How the Stock Market Has Historically Reacted to Wars in the Middle East

When conflict breaks out in the Middle East, markets usually react quickly. Indeed, investors worry about rising oil prices, inflation, and the risk that fighting could spread. As a result, stocks often fall in the short term while money moves into safer assets like gold GLD +0.47% ▲ and U.S. Treasuries. However, when we look at history more closely, the long-term market impact has often been far less severe than many initially expect.

Claim 50% Off TipRanks Premium

• Unlock hedge fund-level data and powerful investing tools for smarter, sharper decisions

• Stay ahead of the market with the latest news and analysis and maximize your portfolio’s potential

Previous Conflicts

For example, after Iraq invaded Kuwait in 1990, the S&P 500 SPY -0.18% ▼ fell roughly 16% between July and October as oil prices surged and recession fears grew. Yet, once Operation Desert Storm began in January 1991 and uncertainty eased, the market rebounded strongly to finish 1991 up by about 26%. Similarly, in the lead-up to the Iraq War in March 2003, stocks were weak amid geopolitical tension. However, after the invasion began, the S&P 500 rallied and ended 2003 up about 26%.

Even during more recent flare-ups involving Iran or Israel, market pullbacks have generally been short-lived. This is because financial markets are forward-looking. Therefore, once investors believe that a conflict will remain contained and will not disrupt global trade in a major way, risk appetite often returns. At the same time, certain sectors often react differently. For instance, energy and defense stocks typically benefit from rising tensions, while airlines and consumer discretionary names can face short-term pressure.

It’s also worth noting that oil USO +5.85% ▲ prices tend to be heavily impacted. Because the Middle East is critical to global energy supply, any threat to production can push crude prices higher, which may increase inflation and pressure consumers. That said, in many historical cases, oil spikes proved temporary once supply stabilized. Ultimately, long-term market performance has depended far more on economic growth, interest rates, and earnings trends than on the conflicts themselves.

Which Defense ETF Is the Better Buy?

As global tensions remain high and governments continue increasing military budgets, many investors are looking for simple ways to invest in defense companies. One way to do so is through ETFs, which offer exposure to a sector without having to choose individual stocks. Three of the most widely followed Defense ETFs are:

• The iShares U.S. Aerospace & Defense ETF ITA +2.37% ▲

• The Invesco Aerospace & Defense ETF PPA +2.14% ▲

• The Global X Defense Tech ETF SHLD +2.42% ▲

According to Wall Street, analysts think that ITA has the most room to run. In fact, ITA’s price target of $269.47 per share implies 11.7% upside potential.

Disclaimer & DisclosureReport an Issue