How War Affects the Stock Market | Defense Stocks

After Israel declared war against Hamas, you might want to know how war affects the stock market. How war affects stock market investors could impact how to invest. While the Israel stock market is expected to suffer, the US stock market has so far remained resilient. But the Israel war impact on stocks, and more importantly the Israel war impact on crude oil will directly affect the US stock market. In the Israel war latest news, we see the conflict so far limited to Hamas and Israel. However, the latest news on the Israel war with Hamas might indicate that Israel intends to attack Hezbollah next. If that Israel war news comes true, it could the Israel war impact on the stock market to deepen. The further this war spreads, and especially if it spreads to Iran and Iraq, the greater the Israel war impact on the share market. Should the impact become great, it could cause a stock market crash just like the Russia Ukraine war did. For now though, investors don’t need to be worried as the stock market during war generally performs well. If you’d like to hedge against an escalation in the Israel war, consider investing in defense stocks, oil stocks, and bonds.

As the Israel-Hamas war escalates, a lot of people are getting concerned about what this is going to mean for the stock market and how it’s going to affect your stocks. And people have a right to be concerned, especially after we saw a major stock market crash after Russia invaded Ukraine in 2022. With this fresh on people’s minds, people are getting a little bit concerned about how this current conflict is going to affect their stocks. So what we’re going to do is cover the stock market effects from the war. Now, I want to say up front, this is not a political channel, so we are not going to be getting into taking sides or who’s right, who’s wrong, what one side should do or should not do. We’re not going to discuss any of that on this channel. All we’re looking at is how this war affects the stock market.

So let’s take a look at how war affects the modern stock market. Now, as we saw over the weekend, the initial response to a war escalation is generally a market sell off. Now this is just due to the fact that investors get worried and concerned, and investors really don’t like uncertainty. But then later in the day, we saw the stock market rise and even finished the day up. And that’s because historically the markets often shrug off escalations from a war. As serious as this escalation is, previous experiences have indicated that it may be unlikely to have a material impact on US economic fundamentals or corporate profits.

So why do stock markets remain resilient through wars? Well, in the US context, stock markets have tended to shrug off initial downturns predicated by conflict. In some ways, wars can actually benefit economies that are not directly affected by the conflict by boosting industrial production to meet the military needs of those engaged in battle. Keep in mind that very often when countries go to war, the US will supply weapons to one country or the other. And because the US has to go produce all of this ammunition and weapons, that can cause the economy to actually get better because it creates a new round of stimulus spending where Congress is now spending large amounts of money to send to a foreign country, either in the form of weapons manufacturing and ammunition shipments, or just in the form of direct payments. So because of that, this can often stimulate the US economy.

So which stocks do the best during a war? Well in general, defense stocks, that is companies that produce weapons and arms, tend to fare the best during a war time environment. Interestingly, energy companies may also see a boost in conflicts that result in higher oil and commodity prices. And in fact, on Monday we did see a jump in oil prices of 4%. And the increase in oil prices is the real reason why the Israel-Hamas war matters for investors. Now oil did jump 4% on Monday, but after last week’s sell off, it’s not really up that much. What matters most though, is the potential for the war to escalate.

The most likely first step is a tightening of sanctions against Iran, which helped plan the Hamas attack. That would reverse the easing of tensions with the US that had helped Iran increase oil production by about 0.5 million barrels a day over the past year. And Goldman Sachs estimates that every 0.1 million barrel per day cut to Iranian production would raise the oil price by $1. So this on its own, sanctions against Iran, could double the size of Monday’s jump in oil prices. Beyond that, the war may also derail the improving relations between Saudi Arabia and Israel, and in fact it already has, which could have helped cap oil prices under a US military deal with the kingdom. The US was attempting to work out a deal with Saudi Arabia to have oil purchased at a cap of $60 per barrel. However, with the US supporting Israel and Saudi Arabia now cutting off ties with Israel, this most likely is going to derail any agreement that might have been reached, which means oil prices are now free to rise as high as they ultimately want to go without any cap on oil prices.

Now a worst case scenario is that Israel acts directly against Iran. In that case, oil prices would soar on the assumption that Iran would step up its harassment of tankers coming out of Iraq. So the concern is that right now, oil prices are rising due to concerns that Iran oil is going to be limited and that’s going to cause oil prices to go up. But should Israel directly attack Iran, then Iran might end up harassing Iraq, and that could cause the Iraqi oil prices to also go up, which altogether would easily cause oil prices to go well above $100 a barrel again.

And when oil prices go up, this causes stock prices to go down. Why? Well, a number of reasons. One, it makes consumers have less money to spend. It increases inflation. All of that’s bad for the US economy. But it also decreases the profits of companies – everything from anybody that ships goods and services, to your airline companies, and shipping companies. They all suffer when oil prices go up because it increases their costs, which in turn reduces their profits. And that’s why we see US stocks go down when oil prices go up. So far though, the increase in oil prices has been fairly mute, only going up about 4%, and still well below last week’s highs. For that reason, we did not see a major sell off in stocks on Monday. So we have not gotten a major sell off in stocks due to oil prices yet, but a sell off could come should oil prices continue to go up.

Now the good news for investors is that insuring against a true Iran-Israel conflict is easier than it normally would be. The things to buy – oil stocks, defense stocks, and treasuries – were all fairly attractive anyway as the tight oil market delivered high profits, and bond yields hadn’t been this high since 2007. So the point is, with oil prices coming down, and bond prices being the lowest they’ve been in 15 years, and defense stocks having come down significantly after the initial invasion of Russia into Ukraine, all of these assets were looking pretty cheap already, which means buying pretty much any of these three stocks, whether it be defense stocks or oil stocks or even bonds, is kind of a no brainer right now. Longer term, though, it’s important for stock market investors to remember that previous Middle East conflicts have rarely disrupted markets for long. The exception is the big oil shocks from the embargo of 1973, and the Iran-Iraq war in 1979.

So in summary, so long as the Israeli Hamas war is limited to between Israel and Hamas and perhaps even Lebanon, there’s not really going to be any big shocks to the US stock market. Where the US stock market could really start to drop is if oil prices skyrocket should Iran or Iraq get involved into this conflict. So that’s where we are right now. Nothing to worry about yet. Definitely buying oil stocks, defense stocks, and bonds is a great hedge against an escalation of the conflict. But unless Iran got involved, there should not be a major shock to the US stock market.

Besides, one of the main reasons why investors aren’t that concerned about this yet is the fact that here in the US we have some major economic news coming up this week as well as earnings season starting, both of which are going to be far more important for US stocks than the conflict in Israel. This week we have major US economic news in the form of the inflation data for September. On Wednesday, we get the Producer price Index, or PPI, which is expected to have come down significantly from August. Then on Thursday, we get the Consumer Price Index, or CPI, which is also expected to have dropped from August. And with inflation expected to come down, this is expected to send the stock market higher this week, assuming inflation does in fact come down as much as people think it will.

Now, in addition to that, we have one other major thing that’s going to affect stock markets starting on Thursday, and that is the start of earnings season. Q3 earnings season officially kicks off on Thursday with Delta as well as a number of other large companies reporting. And then on Friday, we get the major banks reporting, including Citibank, BlackRock, Wells Fargo, and the big one – JP Morgan Chase. And after Friday, earnings season will continue throughout the rest of this month and into the beginning of November. So hold on tight for a major earnings season right now as we start to get some idea as to whether the increase that we’ve seen over the past few months in company earnings can continue, or if the slowdown in the economy that we’ve seen in some of the leading economic indicators is actually starting to hurt company profits. Now depending upon whether company profits are able to be maintained or whether those company profits were hurt, will determine whether the stock market actually rises this month or goes down. Keep in mind that historically, the stock market will bottom out in October and it will go on a pretty big rally for the next eight months. All of that will be determined based upon earnings and whether earnings do, in fact, come in better than expected or not.

Now if you want to know everything that’s going on in the market and you want to get prepared every Sunday night or Monday morning for the market ahead, make sure you sign up for my free newsletter that goes out every Sunday night. In that free newsletter, I cover the technical analysis for the stock market, as well as market sentiment, and all of the important market news that will move the market for the remainder of the week. So make sure you sign up for that free weekly newsletter.

Shopping Cart