On Saturday, October 7, 2023, the world witnessed a dramatic turn of events as the militant group Hamas launched a coordinated attack on Israel by air, land, and sea. In response, Israel declared war on Hamas and has since launched waves of counterstrikes. As of Monday, the toll of this conflict is already devastating, with more than 1,500 lives lost from both sides, and more than 2,200 people being injured, according to health authorities.

This unforeseen invasion sent shockwaves around geopolitics in the Middle East. This event could dampen the recent negotiations between Saudi Arabia and Israel. There could be additional sanctions towards Iran, as the Hamas leaders claimed that Iranian security officials helped plan the Hamas’s surprise attack. On the international front, the U.S. pledged additional support for Israel and is sending an aircraft carrier to the area. The U.S. also condemned China for its perceived lack of support for Israel.

Despite the graveness of the attacks, the market responses have been relatively mild. In the first trading day after the attacks, the equity market rose by 0.63%, while the 10-year Treasury bond yield rose to 4.8%. Crude oil prices jumped by 4.3%. While the full extent of this event’s repercussions remains uncertain, we want to share our initial insights into the potential market implications.

Key Takeaways:

Counterintuitively, historical geopolitical conflicts have presented favorable buying opportunities for the S&P 500 over a long-term horizon.
Oil prices might be the most impacted by the conflict between Hamas and Israel. Broader regional involvement could further influence global oil production and oil prices.
The Federal Reserve's actions are expected to remain the primary concern for the market, absent a full-out escalation and direct conflicts between the U.S. and the Middle Eastern countries.

Investors should remain cautious about adding risk to their portfolios after the initial reports of geopolitical events, as it remains difficult to forecast the scale of the conflicts, as well as the impact on the economy and the financial markets. In today’s blog, we evaluated the previous geopolitical conflicts and attempted to draw comparisons to current events.

Potential Impacts on Equity Markets

While the loss of thousands of lives is a tragedy to the world, the impact on the U.S. equity market is yet to be seen. The year 2023 has proven to be anything but uneventful, yet the market remained resilient. Tech rebounded strongly from the start of the year, then the market shrugged off the impacts from regional bank failures. More recently, the market narrative has been centered around the Fed Reserve's actions. We believe that the direction of the bond yields will continue to have the greatest impact on stock prices.

In our analysis of past conflicts, including the invasion of Kuwait (1990), the terrorist attack of 9/11 (2001), and the Russia/Ukraine war (2022), the S&P 500 had mixed returns in the first year, but had either neutral or positive returns in a three-year horizon. A well-structured, diversified portfolio should have limited exposure to commodity volatility, and the regions impacted. Investors should expect more volatility in the short term; however, previous geopolitical conflicts have been good buying opportunities for the S&P 500 over the long horizon.

S&P 500: Performance Three Years After Prior Conflicts

Indexed to 100

Potential Impacts on Oil Prices

Conflicts in the Middle East have often led to volatility in crude oil prices. The extent and direction of the impacts are usually determined by two major factors: global oil supply and consumer demand. Supply is influenced mainly by the collective actions of oil-producing countries, such as Saudi Arabia, Russia, and the United States, while demand is impacted by global economies and consumer activities.

Of the three scenarios we analyzed, the supply of oil was called into question, though the path of oil prices varied. We found oil prices initially spiked after the invasion of Kuwait and the Ukraine/Russia war, then normalized over time. In contrast, oil prices dropped significantly after 9/11 then quickly rebounded over a three-year horizon.

Oil Price: Performance Three Years After Prior Conflicts

Indexed to 100

Given Iran’s suspected involvement in the planning of the attack, the US is likely to harden its sanctions against Iran and restrict oil sales. Goldman Sachs estimates that every 100k barrel per day cut to Iranian production would raise the oil price by $1. At the same time, the U.S. has expressed support for Israel and is sending an aircraft carrier to the area. If the U.S. successfully intervenes and the situation quickly de-escalates, the impact on oil prices could be muted. Therefore, we recommend a “wait and see” approach when making investment decisions.

Conclusion

Our analysis of historical scenarios indicates that it is difficult to predict how geopolitical events will affect markets in the short term. Ultimately, the future path of stocks and bonds will depend more on more-staid factors such as economic growth and inflation here at home. While short-term performance is important, we strongly encourage investors to focus on longer-term goals and success, as our research shows that short-term market volatility is expected to normalize over time, and geopolitical events have often presented favorable buying opportunities.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Investment Services, LLC, Bluespring Wealth Partners, LLC, and Grove Point Financial, LLC. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by any entity for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Investment Services, LLC, Bluespring Wealth Partners, LLC, and Grove Point Financial, LLC. Does not offer tax or legal advice.

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