This past weekend, we all woke up to horrific news of the surprise attack on Israel by Hamas from the Gaza Strip. Though there are far reaching geopolitical considerations for political punditry and military strategist pontification, our focus is on possible investment ramifications.
Recall our saying, “uncertainty is the kryptonite of the financial markets.” Few things are as uncertain or destructive as armed conflicts or wars. To many, it may seem odd that the financial markets produced positive returns during the initial trading day after the attack. Shouldn’t military conflict, which clearly qualifies as uncertainty, have had a negative effect on the investment markets? In short, yes and no.
Unfortunately, the Middle East is prone to conflict conditioning investors to military friction. Every few years, the Middle East has some sort of incursion, invasion, or attack. These center around religious sectarianism, regional control, and land grabs. The regularity of such events no longer takes investors by surprise. Following a call for calm, financial markets look beyond the initiate attack and retaliation towards a short-term resolution and return to business as usual.
The Hamas-Israel conflict has so far been isolated to regional combatants and humanitarian tragedy. The affected provincial area has limited economic or business interests. Financial markets may change their tune should the conflict broaden to urban areas of Israel with wider business interests, effect globally necessary energy sources, or draw other regional or global powers into the conflict.
Financial markets can seem callus at times. At the end of the day, financial markets are preoccupied with cash flow and profits. Regional conflicts, flareups, or contained wars may have limited or no impact on international trade. By contrast, larger wars can alter transactional flow impacting the global economy. In the end, businesses are created to offer an appealing product or service and generate cash flow without weighing in on isolated skirmishes.
U.S. Treasuries, in particular, are a proxy for the U.S. dollar which is the world’s de facto reserve currency and a safe haven asset. Naturally skittish bond investors favor the safety of Treasuries during periods of insecurity. Over the past few days, bond yields have come down as bond prices have increased. In the near-term, this has helped buoy bond returns hurt by a couple the Federal Reserve’s surprise rate hikes in 2023.
These comments are not to make light of the atrocities of this past weekend, but to give perspective to the seemingly detached financial markets. At this point, the financial markets are expecting this latest brawl to follow the historical blueprint and remain as a short-term contained event. We will continue to monitor this disturbing situation. Despite the Middle East clash, please do your best to enjoy your weekend cheering for your favored sports team.