Major Middle East Conflicts And The Stock Market: What History Teaches - Seeking Alpha

Major Middle East Conflicts And The Stock Market: What History Teaches | Seeking Alpha

Major Middle East Conflicts And The Stock Market: What History Teaches

S&P 500 Index (SP500),

DJI,

NDX,
SPX

Summary

- Conflicts in the Middle East can impact global financial markets, particularly the S&P 500, due to disruptions in oil supplies and international trade.
- The Hamas/Israel conflict has not had a significant impact on the S&P 500 so far, but there are potential scenarios that could lead to disruptions in global oil markets and a recession.
- Historical examples, such as the Six-Day War and the Gulf War, show that the S&P 500 can experience short-term sell-offs during conflicts, but often recovers quickly.

thitivong

To start the article with the most important message, let me say that I am deeply troubled by the human tragedy caused by the Hamas/ Israel conflict. Accordingly, the movements of financial markets, and the analysis of stock prices, are of relatively minor significance compared to what is happening to the many lives affected by the conflict in the Middle East. This thought I do recognize and share deeply.

Nevertheless, my focus on writing for Seeking Alpha continued to anchor on financial commentary. And following the events of what is happening in the Middle East, I aim to provide investors with a reference analysis of how conflicts in the Middle East have historically impacted global markets - specifically stocks. In that context, I provide insights on how the S&P 500 ( SP500) performed surrounding the key events: 1) Six-Day War of 1967; 2) the Gulf War, 1990-1991; 3) the Iraq War, 2003-2011; and the 4) Arab Spring, 2010-2011.

Why The Middle East Matters For Financial Markets

Conflicts in the Middle East can impact the S&P 500 and global financial markets in several ways. Firstly, the Middle East is a major source of global oil production, and any instability in the region can disrupt oil supplies, leading to price spikes. And as investors certainly know and understand, higher oil prices can increase production costs for many S&P 500 companies, which affects their profitability.

Relating to being a key geography for oil supply and trade, the Middle East plays also a crucial role in international trade. For example, the Suez Canal (Egypt), is one of the world's most vital waterways, connecting the Mediterranean Sea to the Red Sea, thus being of major importance for economies in Europe and Asia. Similarly, the Strait of Hormuz (Iran/Oman) is arguably the world's most important chokepoint for global oil trade, with approximately 21 million barrels of oil passing through the Strait every day (about 20% of global demand). In addition, in the Middle East, there are also many important global trade hubs for goods, including the Port of Jebel Ali (United Arab Emirates, Port of Jeddah (Saudi Arabia), Port of Haifa (Israel), Doha Port (Qatar), and the Chabahar Port (Iran).

Considerations On The Hamas/Israel Conflict (2023)

So far, the Hamas/ Israel conflict has not impacted the S&P 500 much. But markets are not entirely out of the woods yet. Specifically, investors should consider that conflicts in the Middle East have the potential to send tremors through the global political landscape, with second-order consequences affecting evolvement not only from key countries in the Middle East, most notably Iran but also international countries with an interest in oil supply and political/ defense-support agreements, such as the U.S. and China.

Personally, I see two main scenarios that investors should watch to assess the impact of the war on markets. In the first scenario, the conflict remains confined to Gaza and Israel, thus not affecting oil prices and the global economy much. In the second scenario, however, the conflict spills over to neighboring countries like Lebanon and Syria, perhaps also turning into a proxy war between Israel and Iran. Such an outcome may easily disrupt global oil markets, with Bloomberg Economics estimating that oil prices may surge to above $150 a barrel, clearly bringing the potential to tip an already weakened global economy into a recession.

With that frame of reference, it is worth noting that by Friday 13, October, the price of oil /Brent benchmark) surged to its highest point since the onset of the Israel-Hamas conflict, surpassing $90 per barrel. The U.S. marker, West Texas Intermediate, also increased notably, by 5.9% to $87.69 per barrel.

Now let's see what history teaches.

The Six-Day War of 1967

Let's start with the most notable, direct example of a conflict involving Israel, the Six-Day War of 1967, Jun 5, 1967 - Jun 10, 1967. The event in question was a brief but highly consequential conflict between Israel and several neighboring Arab states, including Egypt, Jordan, and Syria, resulting in a crushing victory for Israel. While a significant geopolitical event, the Six-Day War did not have a notable, or sustained impact on the S&P 500. In fact, as highlighted in the chart below, the start of the war only led to a short-lived 5-10% sell-off in the S&P 500, which the index quickly recovered, continuing to chase new valuation highs.

TradingEconomics

Gulf War (1990-1991)

Next, the Gulf War was a conflict triggered by Iraq's invasion of Kuwait in August 1990. Contrary to the Six-Day War, the Gulf War caused a notable impact on global markets, including the S&P 500. In the first week of the war, the S&P 500 dropped sharply, falling over 9% on concerns relating to disruptions to the global oil supply chain. However, as the war continued, and international efforts helped to remove Iraqi forces from Kuwait, markets rebounded quickly and aggressively. By the end of the war in February 1991, the S&P 500 had recovered much of its losses and ended the year slightly positive.

TradingEconomics

Iraq War (2003-2011)

Next, in the spring of 2003, the U.S. led an invasion into Iraq, resulting in mixed effects on the S&P 500. The market pressure on the S&P 500 was confined mostly to the months leading up to the invasion, with the index declining by approximately 14% as markets correctly anticipated the war. But once the war started, markets didn't move much. In fact, after the capture of Baghdad, the stock market began a slow recovery, followed by a sustained bull market leading up to the Great Financial Crisis.

TradingEconomics

Arab Spring (2010-2012)

Finally, the Arab Spring. This event is best understood as a series of protests and uprisings in various Middle Eastern and North African countries, that contributed to regional instability. Although the S&P 500 did fluctuate during this period due to investor concerns about geopolitical instability and its impact on global markets, especially oil supply, the effects were not as pronounced as in some previous conflicts.

TradingEconomics

Investor Takeaway

The Hamas/ Israel conflict sends a feeling of unease through the world, with worries extending to investor confidence in stocks. However, while broader concerns about what is happening in the Middle East are more than justified, the lessons of history do not suggest that a conflict in the Middle East is bearish for the S&P 500.

Reflecting on the insights of history, I hope this article can ease concerns about the stock market's reactions in response to the Hamas/ Israel conflicts. In that way, we can again focus our energy and thoughts on how to support efforts to restore peace and reduce human suffering. Stay safe.

This article was written by

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

not financial advise

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