How Will the Israel-Hamas War Impact the Stock Market?

Men looking at stock quotes at Nasdaq MarketSite
Credit: Reuters / Gary Hershorn -

The news that Israel has declared war following an attack on its territory and its citizens by Hamas is one of those things that is shocking and unsurprising. It is shocking in that it is the realization of a lot of people’s nightmares, an all-out war in the Middle East that threatens to pit nation against nation and engulf the region. There is also the possibility of powers outside the area getting dragged into the fighting as well, which takes it beyond shocking and into terrifying.

And yet it is unsurprising given the fact that this is a part of the world that has been in conflict for millennia, where extremists seem always ready -- eager, even -- to use violence in pursuit of their aims and to “settle” scores that in many cases go back thousands of years.

Sometimes, a geopolitical tragedy like this leaves traders and investors with a conflict of interest. When Russia invaded Ukraine in February of last year, for example, I wrote this piece, explaining that, as cynical as it sounded, the best response for the markets would be if the rest of the world basically ignored Russian aggression. However, as somebody who actually believes in democracy and has a dislike of autocratic dictators in general, I was still rooting for massive sanctions and as much support for Ukraine from their Western allies as they felt was needed.

What we have seen since is something in between those two things with enough economic pressure on Russia and aid to Ukraine to prolong the war, but not enough to end it in Ukraine’s favor. The worst of both worlds. Thousands of lives have been lost, with many more ruined, and there is no end in sight.

The impact of that on the market, though, has been minimal, and that is something that traders and investors should keep in mind this morning. Immediately following the invasion, stocks fell, as indications are that they will today.

S&P chart

However, by just the end of that Monday’s trading, the market had bounced back and, just eight trading days later had gained around 9% from the low reached that morning. That had nothing to do with any belief that the war would be over quickly. It was obvious from the response -- or lack of one beyond words -- from most of the rest of the world that that conflict would last a long time. It was rather about the realization that, from an economic perspective, the war just didn’t matter as much as the rate of recovery from the pandemic and other things that were moving markets at the time.

Similarly, while yet more killing in the Middle East is a tragedy on a human and moral level, it is not, at this point, an economic event. There is always a danger of escalation whenever weapons are deployed, but in these days of remote warfare giving plausible deniability to allies of either side, World War III is, at this point, unlikely. Violence and conflict in the Middle East has been an undercurrent of geopolitics for decades and while this may be an escalation of things, it is unfortunately nothing new.

This will probably remain a regional conflict, like the war in Ukraine. This war, also like the one in Ukraine, is unlikely to have a major impact on the U.S. or global economies. It wasn’t always that way, of course. Conflict in the Middle East was once considered to be impactful in the past non matter what, because of the importance of oil. There too, though, things have changed. Oil is still important, but alternative fuels have made it not as dominant economically as it once was. Moreover, from an American perspective, the unlocking of massive reserves through hydraulic fracturing has made the U.S. economy less dependent on peace in the Middle East, and those two things combined have lessened the potential for disruption in the Middle East to cause problems here.

A declaration of war by Israel is frightening at any time, but especially given how used we have become to the idea of peace between Israel and several of their regional neighbors. However, both logic and recent history suggest that it will remain localized and, as we are already seeing to some extent this morning, traders will return their focus to the Fed and interest rates. The war could well cause some more weakness for a while in itself, but, as tragic as the situation is in so many ways, the war between Hamas and Israel is not in itself a reason to sell stocks.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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