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The Israel-Hamas war hasn’t set off market panic. Investors are still concerned

By Krystal Hur, CNN

New York (CNN) — Investors have much on their minds these days, but there’s one thing seemingly staying under the radar.

The Israel-Hamas war, which began in early October, initially rattled global financial markets, sending stocks tumbling, the Israeli shekel sliding and oil prices climbing. The US bond market, which was closed on the first trading day following the war’s onset, in observance of Indigenous Peoples’ Day, rallied the day after as investors hurried to protect their portfolios from geopolitical risk.

Yet since then, such worries appear to have fallen by the wayside.

While some investors worried that the war could spread to key oil-producing countries and further crimp global crude supply, oil prices have since pulled back and remain well below the September highs reached when output cuts by Saudi Arabia and Russia gripped the market.

Treasury yields are gyrating around highs not seen in over a decade, indicating there’s yet to be a resurgence of the short-lived flight to safety that took place after the war’s onset. Government debt is viewed as a haven during periods of economic uncertainty.

So, what’s behind the brushoff?

Bigger threats lie ahead

Investors say Wall Street is focusing on what they perceive as more immediate threats: the Federal Reserve’s campaign to raise interest rates and the ongoing earnings season.

“We’re in a little bit of information overload,” said Yung-Yu Ma, chief investment officer at BMO Wealth Management.

About 24% of the companies in the S&P 500 have reported third-quarter results, and 78% of them have beaten expectations, according to FactSet.

Earnings reports from tech heavyweights Alphabet, Amazon, Microsoft and Meta Platforms — some of the biggest drivers of this year’s gains — are in focus this week. Some investors believe this earnings season could revive that rally, after a lull in corporate news over the last few months helped spur uncertainty on Wall Street.

US stocks rallied powerfully during the first half of the year, shaking off regional banking turmoil, a US debt ceiling crisis and recession fears. Traders infatuated with artificial intelligence bid up prices of big tech stocks to staggering heights, helping the benchmark S&P 500 index touch a level within striking distance of a new record high in July.

But that rally has since stumbled, as economic data has showed little sign of cooling despite 11 rate hikes over the past 19 months. Resurging inflation has also sparked fears that the Fed could keep interest rates higher for longer after raising them to their highest level in over 22 years. Those fears took tighter hold after the Fed left additional hikes on the table at its September meeting and indicated it will keep rates elevated through next year.

Potential escalation, potential impact

Now, markets are looking decidedly less bright. The S&P 500 is on pace to log its third consecutive monthly decline. The Dow Jones Industrial Average has given up all of its gains for the year. Those declines could continue if the war escalates or the economy begins to buckle under the pressure of rate hikes over the next few months, or both happen, investors say.

Wall Street hasn’t completely shrugged off the potential impacts on financial markets from the Israel-Hamas war. Traders have sought safety in assets from gold to utility stocks to bitcoin in recent weeks to protect against potential volatility if the war escalates.

“You could certainly have a 7-10% drop in stocks if there was to be an unexpected surge of Middle East conflict,” said David Bahnsen, chief investment officer at The Bahnsen Group.

That could be accompanied by a retreat in yields if investors seek refuge in bonds again, as they tend to during periods of geopolitical tension, said Ma. His firm increased its allocation to longer-term government bonds this week to lock in currently high yields before potential declines down the line.

“Adequate increases in those longer-term Treasury yields is difficult from here until these clouds lift,” said Ma.

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