2014 / Planning

Will turmoil overseas in Middle East affect my stock portfolio?

The Middle East has for long been a volatile region, embroiled within the chaos spawned by ethnic hostilities, religious conflict, and all-out war between the Arab nations and Israel. Even when all else calms down, the resident militant factions continue to wage a guerrilla war that lends a perpetual aura of turmoil and violence to the region.

To the casual observer, distant from the Middle East, the wars involving Israel are but regional conflicts – but now with a 24 hour news cycle the average American is much more aware of these conflicts than they were 30+ years ago. And this awareness gets them asking the question of: “How will this turmoil in the Middle East impact the US stock market and my investments?”

The Short Term Economic Impact

A study of the economic conditions before, during, and after each war clearly illustrates how these episodes in the short term often lead to higher inflation, contraction in growth, loss of reserves, large current account and fiscal deficits, and generally weakened financial systems across all neighboring economies. Furthermore, crude oil prices experience a jump, as they did again following the latest outbreak of fighting during Israel’s military offensive on the Gaza Strip, while there was significant volatility in international stock markets.

While these disturbances do occur with a frightening regularity in the aftermath of each war, of which there have been too many, history would suggest that there are plenty of reasons why investors should remain calm and not make changes to their asset allocation if they are long term investors. Certainly, there has been intense short term volatility, yet the effects observed have been brief at best, particularly on the US stock market, especially when inflation, interest rates, and earnings growth, as well as other economic fundamentals are considered.

The Stock Market’s Reaction To Past Wars in Israel.

If the behavior of the US stock market is studied, during and following the major Arab-Israeli conflicts - most of which have been rather brief - it is revealed that while short-term volatility has occurred, individual investors would be wiser to avoid panicking, and to employ a more long-term investment strategy.

For each war - beginning from the War of Independence following Israel’s creation in 1948 to the Gaza War in late 2008, and during the current Israeli military offensive - the changes in the S&P 500 Index have been relatively small during each wartime period. In fact, they were positive in every case but the first one, and then only because the 1948 war coincided with a bear market coupled with a long recession in the United States.

S&P 500 Index Changes

• War of Independence: -2.7% during the war | +99.3% five years later
• Suez War: +2.9% during the war | +47.1% five years later
• Six Day War: +2.0% during the war | +16.7% five years later
• 1973 War: +1.4% during the war | -13.8% five years later
• Lebanon Invasion: +2.7% during the war | 196.3% five years later

The Lessons to be Learned

For investors who have a diversified portfolio of investments around the globe, the resilience of the S&P 500 after the past conflicts in Israel, should remind us that markets are resilient. If one stays patient and disciplined – and does not react during these often short lived conflicts – they should expect to get paid over the long term. So, if you are in the markets right now and are worried because of Israel’s offensive into the Gaza Strip, then take a moment, and consider whether you will be glad or regretful for having money in the markets come 2024?
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