U.S. Stock Market Records Three Consecutive Gains After Israel-Hamas War: What Contributed to the Rises?

Global markets have been roiled by Israel's recent declaration of war following its bombardment by Gaza-based group Hamas. The conflict has had immediate financial effects, including higher prices for oil and gold, a stronger U.S. dollar, and a decline in airline stocks due to potential Middle East destabilization.

Billionaire hedge fund manager Paul Tudor Jones has expressed concerns regarding the current geopolitical tensions and fiscal situation in the U.S., warning that it would be challenging for investors to hold risky assets. According to Jones, the Israel-Hamas war represents a significant risk-off market environment, creating a threatening and challenging geopolitical environment.

However, the main U.S. Stock market indexes, including Nasdaq, S&P 500, and Dow Jones Industrials, have increased for three consecutive days this week.

Oil prices initially surged at the beginning of the week of October 9 due to the ongoing conflict between Israel and the Gaza Strip. However, by the fourth day, prices had stabilized as traders kept a close eye on regional developments. For oil prices to see sustained growth due to the turmoil in the region, it would require a widening of the conflict to major oil producers such as Iran and Saudi Arabia, as Israel produces little oil.

Despite the severity of the situation and the impact on millions of people, financial markets have remained relatively stable. As James Mackintosh from the Wall Street Journal has noted, even the most devastating news often fails to affect the bottom line indeed. Market movements following the conflict have been smaller than those seen after Friday's jobs report, highlighting a brutal truth - that market forces can be somewhat indifferent to human suffering.

Fundstrat's head of technical strategy, Mark Newton, said that despite recent short-term volatility resulting from factors such as the conflict in Israel, the longer-term technical outlook for markets remains relatively stable. He suggests the S&P 500 could slide down to 4,200 (a 4% decline) before bouncing back up. Newton cites historical data that indicates that market volatility during military conflict tends to be short-lived and expects a recovery in stock prices soon.

In conclusion, while temporary declines in stock prices may occur, the market is expected to recover.

In addition, the rise of two sectors has contributed to the equity market:

According to CFRA chief market strategist Sam Stovall, military shocks tend to be short-lived. While the stock market may initially react negatively to the uncertainty following an event, it typically recovers and advances 60 to 90 days later.

LPL Financial portfolio strategist George Smith found that while stocks retreat after geopolitical events, they often recover quickly. Looking at 24 prior events, Smith noted that equities have historically held up well during wars and military conflicts over the past decades, with the average recovery taking around two months. While geopolitical conflicts can cause short-term volatility, stocks historically show resilience and often recover relatively quickly.

The United States has been a patronizer of Israel, providing significant aid to promote the country's economic prosperity and regional security. In 2016, the U.S. signed a landmark agreement pledging to offer Israel military assistance worth $38 billion over ten years. As Israel must spend $1.2 billion per year on advanced military equipment only available from the U.S., this has led to an increase in the inflow of U.S.-made weapons in Israel, thereby benefiting the U.S. defense majors' profits from international markets. The current conflict between Hamas and Israel is expected to benefit U.S. defense stocks, particularly those that supply weapons to Israel.

U.S. stock indices showed a positive trend in trading on Wednesday as investors analyzed the unexpected rise of wholesale prices in September, as reported by the producer-price index.

Fed decision is another crucial lead on the equity market. Recent comments from Federal Reserve officials suggesting that higher rates may no longer be necessary to combat inflation have been a significant focus for investors. While rates may remain elevated for an extended period, the Fed is expected not to hike rates again in November or December. Additionally, stabilizing oil prices has been beneficial, as escalating violence in the Middle East - a significant area for crude oil - could drive up inflationary pressures. The Federal Reserve's minutes, with recent interest rate changes and dovish statements from officials, are encouraging for investors. Angelo Kourkafas, senior investment strategist at Edward Jones, stated that the minutes support current market trends.

The 10-year Treasury note yield fell to 4.575%, while the 30-year yield dropped to 4.707%. The market focus toward interest rates and inflation, which have been dominant themes over the past few months. The decline in long-term borrowing costs follows comments from Federal Reserve officials suggesting that interest rates may no longer need to be raised during this cycle.

There needs to be evidence of a consumer-led slowdown to achieve a more sustainable reversal to a 4% 10-year Treasury yield. This could ultimately lead the Fed to drop its "higher-for-longer" interest rate narrative.