A Calloused Market Heart

Calluses are generally a good thing, as they are the body’s response to help shield against pain and breach of the skin. Think of calluses as the tough outer layer that stops the harshness and coldness of the world from hitting your nerve endings. Of course, calluses can also form in the heart, and for the same reason, i.e., to stop the harshness and coldness of the world from burrowing into our souls.

When it comes to financial markets, well, they, too, have calluses.

The latest atrocities in the Middle East tell us just that. You see, despite the fact the Hamas attacks on Israel and the future Israeli response to this conflict have dominated the mainstream and financial news, markets have largely remained callously indifferent.

Yet, the situation is set to potentially escalate in the coming days and weeks, so today, I want to provide a dedicated analysis to explain what this situation means for markets.

The following analysis was sent to subscribers of my Eagle Eye Opener, a publication that’s a collaboration with my “secret market insider” that explains what is going on in markets, what to look for that day and what the key events are that will move stocks, bonds, commodities and currencies. Perhaps most importantly, it’s presented in a quick, 10-minute, plain-English read that dispenses with the noise and tunes into the melody of the market.

From the Eagle Eye Opener…

First, we will not spend time addressing the human aspect of the Israel/Hamas situation other than to say it is a tragedy of epic proportions for all innocent civilians, and our hearts go out to the families that have lost loved ones and whose lives have been torn apart.

Yet, the reason we won’t spend time here on the human aspect of this situation is because it doesn’t matter to the markets.

The market is only focused on the economic impact of the conflict, and that’s why tragedies don’t usually impact markets unless they carry with them economic consequences.

Looking at the Israel/Hamas situation, like most geopolitical crises, the market views it through the lens of impact on energy commodities, and in this situation that means oil. For reference, the Ukraine/Russia war was viewed through the lens of a different commodity, natural gas.

So, for the Israel/Hamas conflict, here are the market truths:

• Anything that occurs that the market thinks might reduce the supply of oil will push oil prices higher and stocks lower.
• If the market does not think the events will impact the supply of oil, then the markets will largely ignore the war, regardless of the human tragedy or geopolitical upheaval that ensues.

Given those truths, here is the worst-case scenario for the market.

First, Israel invades Gaza. This is extremely likely to happen.

Second, Hezbollah attacks Israel in retaliation on their northern border through Lebanon, creating a two-front conflict for Israel.

Third (and this is the key point) Iran attacks Israel to support Hezbollah and Hamas, which prompts the United States to launch an attack on Iran, almost certainly destroying much of its oil infrastructure and removing supply from the market. To underscore this risk, South Carolina Sen. Graham will introduce legislation authorizing the president to destroy Iranian oil infrastructure in the event of an attack on Israel.

That is how this conflict goes from isolated (Israel versus Hamas or Israel versus Hamas/Hezbollah) to regional (Israel and the United States versus Iran, Hamas and Hezbollah). And that’s when this conflict would materially impact markets and send oil prices surging.

Absent this spiraling into a regional conflict (whereby Iran gets involved and the United States threatens to attack its oil infrastructure), then this conflict should not materially impact markets beyond the very short term.

Source: StockCharts.com

Notably, this dynamic is why stocks rallied on Monday. President Biden’s trip to the region was seen as an effort to prevent a broader regional conflict, and as long as diplomatic progress occurs, that will pressure oil and help support markets.

Bottom line, for all the noise that will occur in the coming days/weeks, watch oil prices, because that is the barometer of the market’s worries about a regional conflict. If oil makes a fresh closing high above $87.72 on an Israel/Gaza/Hamas/Hezbollah/Iran headline, that’s a clear indicator the situation is legitimately deteriorating and increasing the risk of a pullback in stocks.

If you would like to get this kind of deep analysis on the economy, stocks, bonds and anything that makes the market move, each trading day 8 a.m. Eastern time, then I invite you to check out my Eagle Eye Opener, right now. I suspect it will be the best decision you make today!

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Don’t Be A Bore

“A healthy male adult bore consumes each year one and a half times his own weight in other people’s patience.”

— John Updike

I have never been accused of being boring, and I’m not likely to ever suffer that accusation. The reason why is because I find everything about the world interesting, and people who are interested in the world are never bored.

So, if you don’t want to be accused of being a bore, and thereby consuming one and a half times your own weight in other people’s patience, then cultivate your interest and embrace all the wonder that life has to offer. If you don’t, you’re only depriving yourself of the tremendous beauty, truth and wisdom the world has to offer.

Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

In the name of the best within us,

Jim Woods