The Economic Impact of the Israel-Gaza Crisis

October 16 to 20, 2023


The Economic Impact of the Israel-Gaza Crisis

October 16 to 20, 2023


Market Recap

  • Equity markets were mixed this week as Treasury yields took a break from their relentless push higher.
  • The S&P 500 gained 0.4% on the back of utilities and energy, while consumer discretionary lagged.
  • The TSX added 1.1%, with a 5% jump in energy leading the advance.


Obviously, the biggest news story of the past week has been the conflict in Israel and Gaza. It’s still early days, but the tragic consequences of the crisis in terms of loss of life and people displaced are already apparent. From a markets perspective, we were surprised that the reaction wasn’t more negative in the first few days after the initial attack. This wasn’t a sign of callousness, but rather the result of the impact the conflict could have on the U.S. Federal Reserve’s (Fed) mentality; instability in the Middle East may well change the Fed’s timing on a rate-hiking pause and, ultimately, rate cuts. Like the Russia-Ukraine war, we expect this crisis to have some economic spillover. In that case, markets’ immediate negative reaction fizzled relatively quickly, but more than a year and a half later, the conflict still hasn’t been resolved. Likewise, this conflict is unlikely to resolve quickly, and while it may not significantly affect the world economy, it could have a major impact on Energy and oil prices. As a result, we believe that oil has some upside that is not yet reflected in its current price.

Bottom Line: This tragic situation is unlikely to be resolved any time soon, and as with previous crises in the Middle East, it could have significant ramifications for Energy and oil.


Is recent market turbulence the result of seasonality, or is there something else lurking under the surface? It’s hard to say for sure, but our suspicion is that this isn’t merely seasonal effects, but rather the result of uncertainty regarding central banks’ likely direction. The consumer continues to be doing fairly well, and while there are cracks in the job market, they seem to close up whenever we expect them to widen. The most recent meeting of the Fed was widely interpreted to be hawkish, but when the minutes from the meeting were released, they looked somewhat less so. These contradictions leave investors wondering which direction the economy and markets will go. There are other sources of uncertainty as well, including the Israel-Gaza conflict, the Energy picture, and ongoing labour actions in the U.S. It’s unlikely that the story is going to change until third-quarter earnings are released beginning in October and those results begin to drive markets. That’s when we’ll find out company-specific issues as well as any emerging consumer spending patterns that may differ from expectations. If the news is not overwhelmingly negative, that could push the recession risk out even further. We’ll also be watching for spending during the holiday season. If we see a meaningful drop in expenditure year-over-year, that would be a sign that consumers are tightening their belts because prices have moved up and inflation is taking its toll.

Bottom Line: Recent market volatility is likely the result of the mixed signals that investors are receiving, and it could persist until we see concrete earnings numbers.


Fixed income markets continue to be something of a roller coaster. After a historic surge, yields have come down quite a bit in last week; in fact, right now, bond market volatility is even higher than equity market volatility. It’s a ‘bad news is good news’ type of story, as declines in bond yields tell us that investors are feeling somewhat more optimistic about the interest rate outlook. In our view, 4.75% is around where investors would be wise to start considering bonds again, while 4.25% is where you’d likely want to loosen up your bond holdings—that’s the range we’re looking at in this scenario. Given how rapidly yields have moved, there’s still a great deal of uncertainty about which direction fixed income markets will go, as well as questions about when and at what level interest rate hikes will stop. Inflation numbers are not yet at the level where there is unanimous consensus that a pause is imminent, and that’s likely to cause volatility to persist for the time being.

Bottom Line: In this economic environment, bond market volatility is to be expected, though recent declines in yields signal a more optimistic interest rate outlook.


Positioning-wise, we continue to prefer Quality companies. Importantly, this does not exclude Technology—it simply means that we prefer Tech companies that have a wide economic moat, the financial strength to withstand potential hardships, and a broad enough consumer base that feel their products are more necessities than a discretionary spend. Speaking of the consumer, we continue to tilt more broadly toward Staples versus Discretionary, as we expect the consumer to tweak their spending as the economy weakens. We also like Health Care—we think it’s undervalued, and that it’s too early to worry about potential political ramifications of the 2024 U.S. Presidential election. Finally, we believe that Communication Services has gone too far too fast, so we’re happy to take some profits from that area.


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