The Israel-Hamas war is sending investors in search of defensive assets.
Israel declared war on Hamas Sunday after the Palestinian militant group launched a brutal attack that killed at least 1,300 people. Stock markets initially fell Monday, before rebounding.
But investors have since bought up virtually risk-free government bonds, indicating that Wall Street remains worried. An exchange-traded fund that tracks an index made up of US Treasury bonds with maturities longer than 20 years, rose 1.5% this week.
Utilities, energy and real estate stocks have also outperformed the broader S&P 500 index's roughly 1% gain this week. Those sectors are considered defensive since consumers tend to prioritize spending on necessities like electricity and shelter over discretionary purchases during periods of economic hardship.
Oil prices remain well below recent highs but have gyrated this week — and are rising again Friday — as investors worry that the war could escalate into a regional conflict encompassing key oil producers. That could further squeeze global crude supply that's already tight because of output cuts by Saudi Arabia and Russia.
"Any chatter that Israel, now seemingly focused on shutting down Hamas's operations, is preparing to strike beyond the immediate conflict, will escalate upward pressure on prices," said George Smith, portfolio strategist at LPL Financial.
The geopolitical uncertainty has also boosted assets cast away by investors in recent months. Prices of the most actively traded gold futures contracts are up roughly 2% this week, following declines driven by climbing bond yields and the US dollar. The yellow metal is prized for its steadiness even when the economy and markets turn volatile.
Bryan Hinmon, chief investment officer at Motley Fool Asset Management, says that the US could also strain its finances if the country gives financial aid to Israel in addition to its ongoing aid to Ukraine during its war with Russia. That could add to the already staggering pile of US debt at sky-high interest rates, and potentially even call into question the US's ability to pay back that debt, he said.
Still, Hinmon says his firm hasn't made any changes to its portfolio in light of the war and has no plans to do so, citing its approach of trying to look 5-10 years ahead when making its investment decisions.
"Hopefully, that time period allows us to see through to the other side," he said.
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