I write this with a heavy heart as one of my favorite places on this earth, Israel, was heinously attacked by Hamas, targeting both military and civilians in the most barbaric ways, which looks like the playbook from ISIS terrorists. This unprecedented massacre triggered a severe military response from the IDF Israeli Defense Force and a Declaration of War from Israel. Once again, the Middle East is in turmoil, with so many families’ lives ruined and turned upside down. The future in this region is uncertain and people around the world watch with anger, horror and sadness.
Obviously, this is emotional for me. I have always advocated for keeping emotion out of investing and approaching every crisis, even the ones that hit him home (like this for me) with the proper perspective.
Taking a few steps back, my intention is to impart to you that war and conflict have been a persistent feature of human history, and their impact extends far beyond the battlegrounds. One of the key areas affected by war is the financial markets. As we take a closer look at the recent Israeli-Hamas conflict, let’s also dive into the history of investing during global war conflicts to understand the patterns and insights that can guide modern-day investors.
The Israeli-Hamas Conflict: A Brief Overview
The conflict between Israel and Hamas, a Palestinian militant group, is deeply rooted in historical, political, and religious factors. Although the history of the Israeli-Palestinian conflict spans over a century, the formation of Hamas in 1987 gave a new dimension to this enduring strife. Periodic escalations and ceasefire agreements have characterized the relationship between Israel and Hamas, with both sides suffering civilian and military casualties.
The recent confrontations have seen missile launches from Gaza, air strikes by the Israeli Defense Forces, and ground operations. Apart from the obvious humanitarian consequences which are horrendous because those missiles do explode and people are dying, the “ground operations” see small arms fire on the highways and communities of people who are trying to live their lives. These conflicts can uproot families, cause death and destruction, which significantly disrupt the regional economies and global financial markets.
The History of Investing During War
Wars have always influenced global markets, either due to actual disruptions in trade and supply chains or because of perceived risks and uncertainties. Here are a few key observations from past global conflicts:
Short-term shocks but resilience in the long-term: Wars typically result in immediate market downturns. For instance, during World War II, markets experienced significant volatility. However, they often rebound once the uncertainty dissipates or when outcomes become clearer. In the long run, market fundamentals such as economic growth, corporate earnings, and interest rates play a more substantial role than geopolitical events. The short-term is always uncertain but even during wars, car companies will sell cars, Apple will upgrade their iPhone added 50 different camera lenses (kidding) and upgrade the software, people will keep tweeting, grocery shopping, going to ballgames etc. Life moves on and the world continues to spin in both good and bad times.
What do investors historically do during times of conflict? Historically, investors often flock to ‘safe haven’ assets like gold, the US dollar, or government bonds. These are perceived to retain or even gain value during turbulent times. For example, during the Gulf War, gold prices surged as investors looked for stability. Professionally, I do not subscribe to “what most investors do” since that’s like following the crowd to feel safe. From my professional standpoint, my advice is to never follow the crowd, ensure that your financial strategy is designed to help you pursue your life goals and objectives regardless of the crisis du jour.
Regional vs. Global Impacts: While wars can have devastating impacts on local economies, their effect on global markets varies. Regional conflicts, like the Israeli-Hamas clashes, might affect neighboring markets more than distant ones. However, large-scale wars with global superpowers involved can have broader financial implications.
Defense and War-Related Stocks: Companies in the defense sector often see increased demand during conflicts. As governments ramp up military spending, firms producing arms, equipment, and related services tend to benefit. This does not mean that every time there is a conflict to abandon your strategy and invest in defense companies, this is merely a historical observation. Additionally, if you have a broadly diversified portfolio that is professionally managed, you mostly likely have exposure to these companies already.
Post-War Rebuilding: The period following a conflict often sees a surge in reconstruction efforts. This can provide investment opportunities in sectors like infrastructure, construction, and services. I am obsessed with World War II; I read and watch everything I can about it. What is interesting is that prior to WWII, the United States was not the Superpower we are today – in fact, our military was ranked 17th in the world at that time. Since the lion-share of the fighting occurred in Europe and Asia leaving the US untouched sans Pearl Harbor, the reconstruction of these two continents was a massive undertaking and the United States got the contract. This ushered in huge financial opportunities, significantly improving the standard of living in the US. I am not advocating profiteering off any war, in fact since most of my family was wiped out in the Holocaust I would rather that war never occurred, and the US remained as it was. Unfortunately, terrible things occur, and the financial reconstruction is simply the reality of what happens after any and every war, rebuilding and reconstruction.
Applying Historical Insights to the Israeli-Hamas Scenario
Given the localized nature of the Israeli-Hamas conflict, its direct impact on global markets is relatively limited. However, regional markets, particularly those in the Middle East, can be more susceptible to shifts in investor sentiment due to such skirmishes.
For investors considering positions in or around conflict zones:
Diversification Is Key: Geopolitical risks underscore the importance of diversifying investments across regions and asset classes.
Stay Informed, but as Always, Avoid Knee-Jerk Reactions: While it’s crucial to stay updated on geopolitical developments, making impulsive investment decisions based on daily headlines can be counterproductive.
Look Beyond the Immediate: Although the markets seem unphased right now, history suggests that while wars can disrupt markets in the short term, they eventually recover. Investors with a long-term horizon should factor in the bigger economic picture when making decisions.
The Israeli-Hamas conflict, like many before it, serves as a reminder of the intricate relationship between geopolitical events and financial markets. By understanding historical patterns and adopting a measured approach, you can navigate challenging times even more effectively.
I stand with Israel.
