The current conflict in the Middle East involves ongoing tensions, sporadic clashes, and rocket attacks between Israel and Hamas, the Palestinian militant group. Notably, financial markets have, until now, responded relatively calmly to these events, informs Charles Schwab.

“While the human toll is unimaginable, the market’s assessment is that the latest outbreak of war in the Middle East is unlikely to be a material risk to long-term investors,” writes Jeffrey Kleintop, Chief Global Investment Strategist at Charles Schwab. 

Subsequently, he points out that one of the key factors influencing the market’s reaction is the impact on oil and gas prices, a historical focal point during Middle East conflicts. 

Unlike the substantial surge in oil and gas prices seen during Russia’s invasion of Ukraine in February 2022, the current conflict in the Middle East has led to a more modest 4% increase in oil prices. As per Kleintop, this is because Russia, a major global oil and gas supplier, was directly threatened in 2022, while the current conflict primarily puts supplies at risk.

Furthermore, the financial services company contends that while the rebound in oil prices has the potential to contribute to inflationary pressures, it is worth noting that energy goods and services typically account for a relatively small portion of inflation in most developed countries.

Additionally, Charles Schwab points to historical data to suggest that past geopolitical events involving Israel have often resulted in muted and short-lived stock market reactions globally. However, Kleintop emphasises the need to recognize that there are still potential risks of escalation.

“The relatively calm market reaction doesn’t mean there aren’t risks of escalation. A strong reaction from Israel could upset Saudi-Israel relations and make any oil supply increase by Saudi Arabia unlikely in the near term, supporting higher prices,” says Klientop. Also, he suggests that the US can increase sanctions against Iran, which might further tighten global oil supplies.

Summing up, Charles Schwab emphasises that while conflicts can arise, they typically don’t create pessimism among investors unless there’s a global economic recession. In times of even moderate economic growth, the global market’s reaction to perceived threats tends to be short-lived, it adds.

Read the full insight here.