The Latest on Israel, Iran and the Middle East’s War

Just days after Israeli airstrikes killed Hezbollah’s leader, Iran—the Lebanese terror group’s sponsor—responded by launching ballistic missiles into Israel. Markets fell immediately on the news, as headlines warned of fighting potentially spreading across the Middle East. This marks the latest chapter in what has been a tragic year of war, and our hearts go out to all affected along the way. But markets are more coldhearted—always crucial to keep in mind. We don’t know how this conflict will unfold exactly, but in our view, it is unlikely to reach a scale sufficient to pack a material market punch.

Per Iran’s state-run media, Tuesday’s missile attack was a direct response to the September 27 killing of Hassan Nasrallah, carried out by Israeli forces. Nasrallah was Hezbollah’s long-time leader, who led and crafted attacks on Israel, including firing rockets into the country after Hamas’ deadly 10/7 strike last year. Thankfully, Israeli officials reported little damage and few casualties from Iran’s missiles, as the country’s Iron Dome air defense system and US Naval forces in the eastern Mediterranean intercepted many of the roughly 200 inbound missiles. Notably, the attack coincided with an Israeli ground incursion in southern Lebanon, which military officials said is aimed at Hezbollah targets posing an immediate threat to communities in northern Israel.

While sudden escalation can be jarring, this doesn’t seem very shocking, in our view. It is part of a nearly year-old conflict that hasn’t derailed this bull market. Headlines couched the attack as a new and shocking twist, but it is Iran’s second retaliatory missile attack on Israel this year. The first came on April 13, when Iran launched hundreds of drones, ballistic missiles and cruise missiles into Israel—a response to airstrikes on an Iranian base earlier that month.^[i] At the time, pundits’ reaction largely mirrored what we saw on Tuesday: Warning Iran’s attack meant wider Middle Eastern conflict was imminent, with other players sure to step in. Global markets experienced an initial shock when they reopened after the weekend attack, falling -2.8% the next week.^[ii] Many feared a spreading war could usher in a new bear market.

Yet this wasn’t the case. Stocks moved on quickly, recouping the decline in less than a month.^[iii] Israeli stocks took a similar trajectory.^[iv] Markets haven’t really looked back, either: Global and Israeli stocks are up since April’s attacks, despite occasional volatility, and far above levels seen before October 7, 2023, when the conflict began.

Fast forward to the present, and markets’ reaction doesn’t differ much this time. Global stocks fell -0.8% on Tuesday, slightly less than on April 15 (the first trading day after Iran’s attacks), while Israeli stocks fell -1.9% in shekels, a hair more.^[v] We doubt the sentiment effect lasts long.

In April, both parties to the conflict signaled it was a one-and-done. This time, rhetoric is tougher, but even an escalated regional conflict isn’t tantamount to the sort of major, global fighting and destruction it would take to rattle stocks for long. The likelihood of this conflict spreading to a much broader international theater, hitting home soil in major economic centers, is exceedingly low. As markets realize this and scale the local costs and effects, they tend to move on. Absent a big, unseen global escalation that affects a much larger chunk of the global economy, we have already seen that this conflict’s sustained market-moving power is minimal.

For war to have a lasting market effect, history suggests it must affect a large enough swath of the global economy to disrupt world commerce, global growth and developed world corporate earnings. The only modern example of war being a bear market’s proximate cause is WWII. Regional conflict can—and often does—spark volatility tied to uncertainty. But typically, the uncertainty fades and markets recover well before the fighting ends.

Moreover, there is a long history of Middle East conflict staying local and not affecting markets for long, if at all. Israel and Hezbollah tangled in July 2006 without ending stocks’ ongoing bull market. Markets dipped months in advance, but rebounded once the conflict began. Looking further back, 1967’s Arab-Israeli Six-Day War didn’t halt a nascent bull. Here Israel faced three regional powers in Syria, Jordan and Egypt—more and arguably bigger players than those sparring today. The Yom Kippur War in 1973 coincided with a bear market. But that bear market began nine months earlier and had a morass of causes including already-hot inflation and price controls. And the war itself led to a coordinated OPEC oil export ban. The Iran-Iraq War from 1980 to 1988? While the Volcker Fed tightening stoked a bear market starting several months after the outbreak of fighting, it ended in 1982. Stocks went on to post great returns through 1987’s bull market peak.

Now, Russia’s invasion and war in Ukraine may seem like a counterpoint, given it happened early in 2022’s bear market. But here, it wasn’t the fighting itself that caused markets to drop. Rather, fears of energy supply disruptions collided with extant inflation fears to roil sentiment. Fears of Fed rate hikes and other items added to the gloom, spurring a shallow bear market. But stocks recovered quickly and continued notching new highs even as the fighting showed no signs of ending soon.

We wouldn’t be surprised to see more volatility ahead as uncertainty remains high. But markets have a long—and recent—history of moving on from these things quickly.