The New York Stock Exchange (NYSE) in New York, U.S., Friday, Oct. 20, 2023. Credit: Michael Nagle/Bloomberg/Getty Images

New York (CNN) -- Investors have a lot to think about these days, but there's one element that seems to go unnoticed.

The war between Israel and Hamas, which began in early October, initially shook global financial markets, causing stock markets to plummet, the Israeli shekel to plummet, and oil prices to soar.

The U.S. bond market, which remained closed on the first day of trading after the start of the war in commemoration of Indigenous Peoples' Day, rallied the next day as investors rushed to protect their portfolios from geopolitical risk.

Since then, however, those concerns seem to have faded.

Although some investors feared that the war would spread to major oil-producing countries and further reduce global crude supply, oil prices have since retreated and remain well below the highs reached in September, when production cuts from Saudi Arabia and Russia took over the market.

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Treasury yields are hovering around highs not seen in more than a decade, indicating that there has yet to be a resurgence of the short-lived flight to safety that took place after the start of the war. Government debt is seen as a safe haven in periods of economic uncertainty.
So what's behind the sharp drop?


Bigger Threats Lie Ahead

Investors say Wall Street is focusing on what they perceive as more immediate threats: the Federal Reserve's campaign to raise interest rates and the current earnings season.

"We're a bit saturated with information," says Yung-Yu Ma, chief investment officer at BMO Wealth Management.

About 24% of S&P 500 companies have already reported their third-quarter results, and 78% of them beat expectations, according to FactSet.

Earnings reports from big tech companies — Alphabet, Amazon, Microsoft, and Meta Platforms, some of the biggest drivers of earnings this year — are in the spotlight this week. Some investors believe this earnings season could reignite that rally, after a lull in corporate news over the past few months helped fuel uncertainty on Wall Street.

U.S. stocks rose sharply during the first half of the year, shaking off regional banking turmoil, the U.S. debt ceiling crisis and recession fears. Traders, infatuated with artificial intelligence, pushed the prices of big tech stocks to astonishing heights, helping to push the benchmark S&P 500 index just shy of hitting a new all-time high in July.

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But that rebound has faltered since then, as economic data has shown little sign of cooling despite 11 interest rate hikes over the past 19 months. The uptick in inflation has also sparked fears that the Federal Reserve will keep interest rates higher for longer, having raised them to their highest level in more than 22 years. These fears intensified after the Federal Reserve left further hikes on the table at its September meeting and indicated that it will keep rates elevated until next year.

Potential Escalation and Impact

Now, markets are decidedly less optimistic. The S&P 500 is on track for its third straight monthly decline. The Dow Jones Industrial Average gave up all of its gains for the year. These declines could continue if the war intensifies or if the economy begins to buckle under the pressure of rate hikes in the coming months, or if both occur, according to investors.

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Wall Street has not completely ignored the potential repercussions of the Israel-Hamas war on financial markets. In recent weeks, traders have sought safety in assets such as gold, utility stocks or bitcoin, to protect themselves from potential volatility if the war escalates.

"If there were an unexpected increase in conflict in the Middle East, the stock could fall by 7% to 10%," said David Bahnsen, chief investment officer at The Bahnsen Group.

That could be accompanied by a pullback in yields if investors return to holding bonds, as they often do in periods of geopolitical tension, Ma said. His company this week increased its allocation to long-term government bonds to lock in today's elevated yields ahead of potential declines in the future.

"It is difficult for long-term Treasury yields to rise until the storm clouds dissipate," Ma concluded.

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