The Financial Ripple Effects of The Israeli-Gaza Conflict

Amid the complexities of the global financial landscape, the recent developments surrounding the Israeli-Gaza conflict have garnered significant attention. The situation carries with it the potential to reshape various economic sectors, most notably the energy market. Historically, any significant disruption in the Middle East has the potential to raise oil prices, which could, in turn, drive inflation. When inflation goes up, it often leads central banks, like the Federal Reserve, to contemplate maintaining or even raising interest rates.

Recently, equity markets showed resilience despite the geopolitical tension. After what can only be described as a sluggish September for equities, the market displayed an unexpected rally in the aftermath of the Israel-Gaza situation. Specifically, the S&P 500 has rebounded impressively, gaining by approximately 3.2% (as of Oct. 12, 2023). The uptick can be attributed to robust corporate earnings, but it may also indicate the oversold nature of the stock market, especially after witnessing downturns in both August and September. Perhaps market participants are growing increasingly desensitized to geopolitical risks or are seeing these events as transient.

Recent behavior in the bond market has also been quite notable. As concerns about the Federal Reserve’s response to potential inflation mounted, many sought refuge in Treasury bonds, which, in turn, relieved some pressure in the stock market. This year, bonds have been volatile; they dropped, bounced back and then dropped again. However, as the fog of the COVID-19 pandemic lifts, the bond markets are gradually regaining their footing, allowing bond investors to finally earn interest on their investment after an extended dry spell. This serves as a reminder of the crucial role bonds play in diversification, even if short-term dynamics are challenging.

As the bond market navigates the tumultuous waves and the Federal Reserve gauges its response to potential inflationary signals, a new Consumer Price Index (CPI) report has come into play. Excluding volatile food and energy prices, core CPI increased 0.3% on the month, and 4.1% on a 12-month basis in September, which was in line with expectations. Recent data does not indicate any drastic swings to sway the Federal Reserve from its present trajectory, so we believe it is not quite done raising rates. We are leaning toward the endgame, with the Federal Reserve possibly in the eighth or ninth inning of its rate hike cycle.

While many suffer from recession-talk fatigue, there is speculation about whether the economy is on the cusp of a downturn. With rising energy prices and the onset of student loan repayments, consumer spending may witness a crunch, which could assist the Federal Reserve in its efforts. However, the consistent strength of the consumer, fueled by changing demographics, such as the growth in the senior population from 13% to 18% over the past decade, suggests resilience. Notably, Baby Boomers this demographic tend to be more consumer-centric and less burdened by debt, which might be pivotal in bolstering consumption.

While recent months may not feel robust for many investors, having a longer-term perspective is crucial. Always remember, as the world evolves and markets adjust, staying informed and understanding the intricate connections between global events and the markets is vital to making prudent decisions. If ever in doubt, consult with your financial advisor at The Wealth Alliance to get a clearer picture of your portfolio’s trajectory.