The Hamas invasion of southern Israel over the weekend, while an eruption of an on-going regional conflict and humanitarian crisis has the potential to expand to a prolonged conflict that historically has been a headwind for global equity markets.
A look back at the impact of such geopolitical conflicts – ranging from coups/assassinations, to terrorist events, and including cross border wars between nation-states – on the S&P 500 going back to 1940, in aggregate they suggest modest upfront impact of such events which dissipate quickly (please see Russia-Ukraine: Implications for Global Markets, March 2022 for more details).
However, the type and duration of event is significant in understanding the potential impact upon markets Indeed, domestic terrorist attacks (2004 Madrid, 2005 London, etc.) have historically had only temporary impacts on markets, with the S&P 500 rising, on average 3-12 months afterwards.
Importantly, however, prolonged conflict between or eventually drawing in multiple nations has presented at least a 6-month headwind to US equity returns with the notable exception being the start of hostilities in Korea. Implications
Thus, the risk that the largest incursion into Israel since 1973 transforms from a localized event to one that is prolonged and engulfs a wider range of nations should be among the key concerns for investors. Indeed, a prolonged conflict has the potential to draw in Iran and imperil the potential normalization of Saudi-Israeli ties that reported to be close to being announced.v
With Iranian exports and US releases from its strategic petroleum reserve having virtually fully offset Saudi supply cuts since September, a global response which reduces Iranian supply where Saudi Arabia does not compensate with increased production would create a renewed supply shock for global energy markets. With energy equities historically cheap on an absolute basis and relative to the broader market, the sector may offer a safe haven amidst the geopolitical uncertainty introduced over the weekend.
