When the current trading week began, the stock market got an initial jolt from the Israel-Hamas War, with futures retreating early Monday amid the first attacks. But later in the day, the market showed grit and stocks were climbing on Tuesday.
Money has been pouring into safer assets, triggering a fall in Treasury yields. In turn, this has boosted stocks, with prices rising as the downward pressure of rising yields eases.
Of course, the main question as the military action continues is whether this will be a relatively limited engagement or whether other Middle Eastern powers such as Iran will be drawn into the conflict. This will play a key role in the long-term repercussions for the market.
"In general, at the start of any war there tends to be a flight to safety — U.S. Treasuries, U.S. Dollar, gold, etc. And we generally see (buying) in defense contractors," said Art Hogan, chief market strategist at B. Riley Wealth. "Lastly, if the event is in a region where there is oil production, we tend to see a fear of disruption of supply bid. All of those have played out this week."
Hogan told Investor's Business Daily, though, that the longer-term effects of any conflict tend to "vacillate with the duration and scope of the war."
Defense Stocks, Energy Plays Gain On Israel-Hamas War
Two areas of the stock market that shined as the Israel-Hamas war escalated on Monday were defense stocks and oil and gas plays.
Key defense firms General Dynamics, L3Harris Technologies and Northrop Grumman each retook key moving averages. NOC stock managed to pop 11.4% Monday and held the bulk of its gains Tuesday.
The potential for wider unrest in the Middle East also helped propel energy stocks higher. The likes of SLB, Exxon Mobil, ConocoPhillips, Baker Hughes and BP) all lifted. Warren Buffett holdings Chevron and Occidental Petroleum also gained.
CFRA chief market strategist Sam Stovall told IBD that stocks have shown themselves to be durable during past geopolitical conflicts.
"Historically, military shocks on their own have tended to be short-lived. Typically, the stock market initially reacted negatively to the uncertainty by declining in the first day and month after the event, but then recovered and advanced 60 and 90 days later," he said.
He added: "The two big outliers were the Yom Kippur War, which exacerbated the 1973-74 bear market due to OPEC shutting off supply to the U.S., and Iraq's invasion of Kuwait, since it occurred at the start of the 1990 recession and bear market."
According to Stovall, how oil prices respond going forward could decide whether this remains a headline event or "becomes a bottom line one."
Stock Market Historical Picture Mixed
LPL Financial portfolio strategist George Smith also found that while stocks do tend to retreat following geopolitical events, they often bounce back relatively quickly.
He looked at 24 prior geopolitical events. Pearl Harbor had the biggest drawdown, with the benchmark S&P 500 falling as much as 19.8%. That took 307 days for stocks to recover. The North Korean invasion of South Korea in 1950 and the Iraqi invasion of Kuwait in 1990 saw drawdowns of 12.9% and 16.9% respectively. The former took 82 days before losses were erased while the latter took 189 days.
September 11 also saw a sizable drawdown of 11.6% on the S&P 500 but it took just 31 days for stocks to recover. The Russia-Ukraine war saw the benchmark index tumble as much as 6.8% but it took just 23 days for losses to be recovered.
Other events had even more limited impacts. The S&P 500 actually made a 0.9% gain on the day of the London subway bombing in June 2005, and did not suffer any kind of drawdown.
"Equities have historically held up well during geopolitical shocks, including wars and other military conflicts going back decades, with the average recovery taking roughly two months," Smith said in a note to clients.
These Factors Could Boost Stocks
While there has been a flight to safety, some distinctly dovish Fedspeak so far this week also soothed markets.
Oanda senior market analyst Edward Moya told IBD that investors should be wary in case gains prove to be short-lived.
"It seems likely that another could keep energy prices heading higher, which could prove to be troubling for global growth prospects," he said. "The relief with global bond yields however is triggering some buying back in to the stock market, but that might not trigger a long lasting rally."
Nevertheless, CFRA's Stovall is optimistic on the picture heading into the year's end. He said the fact the U.S. dollar weakened and that share prices rose implies traders believe the Israel-Hamas war will not trigger a new bear market.
"We still think the market is preparing for an end-of-year advance on declining inflation, improving seasonals, and rising EPS," he said.
Of course, things can quickly change when it comes to the stock market. Make sure to stay on top of any sell signals in your portfolio. Also follow charts closely and keep a close eye on the market trend page here.
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