The conflict between Israel, Iran, and now the United States, continues to be the focal point for investors large and small. While the bears contend that the escalating war in the Middle East will cause oil and, in turn, inflation to spike, both the markets have held up remarkably well through Friday.

If my calculator is correct, the S&P 500 closed the week just about 3% (2.95% to be exact) from its all-time high. Thus, it can be argued that up to this point, investors aren't exactly freaked out about the possibility of bad things happening in the markets anytime soon.

Although the talk about recession has increased a bit lately, the economy continues to be doing just fine, thank you. According the Atlanta Fed, their GDPNow for Q2 reading currently sits at 3.4%. And while I can be accused of being a glass-is-half-full guy, that seems pretty good to me. Or at the very least, the current state of the economy is a far cry from the recession that our furry friends have been yammering on about for a couple years now.

For the record, my reference to the "markets" includes the bond market. As I've stated a time or twenty over the years, whenever I find myself wondering what the deal is with a particular macro situation, I turn to the bond market. Remember, bond traders only care about two things. The yield on their paper and getting their money back. And if something bad is about to or expected to happen, bond yields have historically plunged.

The point is if traders feared a really big, bad event - you know, something that would impact the economy in a meaningful way - the yield on the U.S. 10-Year Treasury Note would move to "flight to safety" mode. However, as of Friday's close, the yield on the 10-Year sits smack in the middle of both the near- and intermediate-term trading ranges.

To be sure, the fact that missiles are flying muddies the macro picture for the markets. And some ongoing volatility is certainly to be expected. Yes, an oil spike could throw a monkey wrench into the trend of inflation and the Fed's calculus. And yes, things could get VERY messy, VERY fast on the global geopolitical stage, which, of course, could give markets some heartburn.

However, before you run out and sell all of your AI stocks for fear of WWIII breaking out, let's remember that Wall Street traders love their historical analogs. And the bottom line is that "war events" tend to be (a) short-lived and (b) not that bad for stocks.

In my nearly 40-year career of managing other people's money for a living, I've been through a handful of "war events." What I've learned is that after the initial fear/panic about a war starting, the market tends to trade based on how the war is going.

For example, in 1990 everybody worried about Iraq's military might. The fear was the US was venturing into what would surely end in a world war. As a result, stocks went down as Kuwait was invaded. However, once folks realized that the U.S. quickly ruled the skies and the Republic Guard proved to be toothless, stocks rallied.

The trend of "war events" has been pretty much the same for the last 45 years. Below is a summary of the various war events since 1990 and how the DJIA acted 1-, 3-, and 6-months later.

As you can see, stocks tend to eventually move higher after these various war events have occurred. My take is this is due largely to the idea that the US military proved successful and the economy was never impacted.

The Bottom Line

Although the market continues to deal with a plethora of moving parts including a fresh war with Iran, the tariffs, and the Fed, the big macro questions remain the same. Will the economy be impacted by the warring in the Middle East and/or tariffs yet to be imposed? Will inflation tick higher over time in response to tariffs? And to what degree will corporate profits be affected?

So far at least, the action in the markets suggests that there isn't a lot to fret about from a macro perspective. This does NOT mean that stocks can't have some bad days/weeks based on the news, tweets, etc. But for now, I think it's best to, as the British are famous for saying, stay calm and carry on.

Thought for the Day:

What the world needs is more geniuses with humility, there are so few of us left. - Oscar Levant

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research, a Registered Investment Advisor

Disclosures

At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None - Note that positions may change at any time.

NOT INDIVIDUAL INVESTMENT ADVICE. IMPORTANT FURTHER DISCLOSURES