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    • S&P 500, Dow and Nasdaq fall, but oil prices rise after Iran attack
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    S&P 500, Dow and Nasdaq fall, but oil prices rise after Iran attack

    Eira Gwyneth Posted on

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    Major U.S. stock indexes fell while oil prices rose on Tuesday on concerns about escalating tensions in the Middle East.

    According to the Israel Defense Forces (IDF), Iran fired missiles at Israel. The IDF’s announcement came just hours after a U.S. official said Iran was preparing imminently for a ballistic missile attack on Israel. The official said the U.S. was actively supporting Israel in its preparations to repel the attack and warned that any direct attack on Israel would have “serious consequences for Iran.”

    Fears that a major conflict in the Middle East could dampen global oil supplies pushed oil prices higher, with WTI crude rising 3.5% as of 2 p.m. ET, economists said. Iran accounts for about 4% of global oil production.

    The jitters also triggered some short-term selling of U.S. stocks and buying of so-called safe havens such as gold and U.S. Treasuries. Around 2 p.m. ET, the broad S&P 500 index fell nearly 1% and the Dow lost half a percentage point, each a day after hitting record highs. The tech-heavy Nasdaq lost nearly 1.5%, gold gained about 1% and the 10-year yield fell slightly in early afternoon trading. Treasury yields move in the opposite direction to Treasury bond prices.

    However, analysts noted that markets still appeared calm and investors were likely waiting for a clearer picture of developments abroad before making major portfolio changes, they said.

    “The situation remains uncertain until the attack and subsequent retaliation occurs,” said Mike O’Rourke, chief market strategist at JonesTrading. “It is premature to make a judgment on how this will impact financial markets in the coming days…The current sell-off in the S&P 500 is relatively small compared to the geopolitical risk.”

    What should investors pay attention to in the Middle East?

    The scale of the Iranian attack and whether it causes significant damage, particularly in civilian areas, will be crucial, said James Reilly, senior market economist at research firm Capital Economics. Iran does not want to risk dragging the United States into the war, he said.

    “We know what happened the last time Iran announced and launched its attack,” said David Belle, founder and trader of Fink Money, noting that the impact was small. The Iranian attack on Israel last April caused only modest damage in Israel due to air defense attacks not only from Israel, but also from the United States, Britain and other allies in the region.

    If tensions escalate and Iran’s oil supplies are disrupted, Reilly said people should pay attention to whether Saudi Arabia increases its production to keep oil flowing to the world. If Saudi Arabia intervenes, oil prices can remain under control.

    If oil prices rise, prices would have to rise significantly to spur inflation, Reilly said. “As a rule of thumb, a 5% increase in oil prices increases headline inflation by about 0.1%,” he said. “It would take a much larger and sustained rise in oil prices to impact central bank policy.”

    Should investors be concerned about strikes at East and Gulf Coast ports?

    So far, investors have shown little concern about strikes at ports on the East and Gulf Coasts that began Tuesday.

    If the strike does not last long, economists expect the impact on both economic growth and inflation to be moderate.

    “While the strike will impact approximately 40% of U.S. container volumes and comes at an inopportune time before the crucial holiday shopping season and election, it is not expected to significantly increase inflation as the port closures in 2021-2022 immediately followed the pandemic,” Eugenio Aleman, chief economist at Raymond James, said in an email. “The reason: declining consumer demand. Slower employment growth, a more sophisticated consumer and an expected slowdown in accommodation costs are likely to limit the positive impact.”

    In Fed hands: Why Fed rate cuts could hurt the stock market and your 401(k).

    What are investors focusing on instead?

    Investors are still largely focused on the prospects of further interest rate cuts from the Federal Reserve, O’Rourke said.

    “In general, investors were enthusiastic about the Federal Reserve’s aggressive easing plans,” he said. They were “willing to put aside the uncertainty surrounding the election and the port strike for now.”

    Last month, the Fed cut its key interest rate, the short-term benchmark interest rate, for the first time in four years to help boost a slowing labor market amid falling inflation. It cut the rate by a whopping half a percentage point to a range of 4.75% to 5.00%, from a 23-year high of 5.25% to 5.5%.

    The Fed also indicated it expects to cut interest rates further this year through 2026.

    Medora Lee is a money, markets and personal finance reporter for USA TODAY. Reach her at [email protected] and sign up for our free Daily Money newsletter every Monday through Friday morning for personal finance tips and business news.

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    Eira Gwyneth
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