While escalating tensions in the Middle East derailed the stock market’s strong start in 2020, some sectors of the market are rising on the news even as nervous Wall Street investors sell assets amid increasing geopolitical risk .
- In the wake of U.S. air strikes that killed Iranian General Qassem Soleimani last week, ‘war stocks’—companies in the defense industry—have climbed: Over the last five days of trading, the SPDR S&P Aerospace & Defense ETF (XAR) rose almost 4%, while the iShares U.S. Aerospace & Defense ETF (ITA) was up 2.5%.
- Big-name defense stocks are rising, with Northrop Grumman leading the rally last Friday. Northrop has risen 8% in the last five days, while Lockheed Martin and Raytheon have jumped around 4% and 2%, respectively.
- Shares of energy and oil companies have risen as well, alongside the surge in oil prices which shot up 4% on Friday, and have now hit above $70 per barrel for the first time in three months. Since the start of last week,Whiting Petroleum, Occidental Petroleum and Hess have seen shares jump 15%, 11% and 5%, respectively.
- As the U.S. awaits Iran’s promised retaliation—which could include cyberattacks against American banks and universities—cybersecurity stocks have also jumped in recent days: The ETFMG Prime Cyber Security ETF (HACK), for instance, has risen nearly 2.5% over the last five days.
- “For the most part, nothing other than rhetoric and hyperbole has resulted from last week’s missile strike, but risks are rising,” says Adam Crisafulli, founder of Vital Knowledge. Given the back-and-forth headlines indicating further escalation, “it makes sense” that sectors like defense and energy are rising.
- Since Thursday’s air strikes, safe haven assets like gold and bonds have rallied: A traditional safe bet for investors, gold has risen nearly 3%, hitting a four-month high at the end of last week, for instance. Another alternative, Bitcoin, rose 9% since the night of the U.S. air strikes.
As tensions in the Middle East continue to worsen, Moody’s issued a warning on Monday saying that any lasting conflict between the U.S. and Iran would have “wide-ranging implications through broad economic and financial shock.” A drawn out conflict would have “global repercussions” for the broader economy, particularly on oil prices and banking sectors, as well as industries in the Middle East like tourism, senior analyst Alexander Perjessy wrote.
Key backgound: While global markets rallied to kick off 2020—amid renewed global trade optimism and a Chinese economic stimulus package—a U.S. air strike that killed a top Iranian general last Thursday caused stocks to plunge following the news. President Donald Trump ordered the strike that killed Soleimani, the leader of Iran’s Islamic Revolutionary Guards’ foreign wing, as a response to a New Year’s Eve attack by Iran-backed militias on the U.S. embassy in Baghdad.
With geopolitical tensions in the Middle East escalating, the broader market fell—but oil prices surged along with safe haven assets like gold and another alternative, Bitcoin. Iran strongly condemned the Trump administration’s air strikes, vowing to retaliate. There is concern among analysts that Iran could do so by attacking oil infrastructure belonging to American allies such as Saudi Arabia. That kind of attack would further disrupt global oil supply chains and prices. There is also potential for widespread cyberattacks by Iran, an approach the country has previously used against the U.S.most notably against big American banks in 2012 and 2013, according to a CNBC analysis.