Investors are brushing off the Iran-Israel conflict as another brief distraction on the road to fresh highs. Steve Hanke thinks their complacency could prove costly.
The professor of applied economics at Johns Hopkins University told Business Insider that Israel has been directly or indirectly tied to seven of the 19 major geopolitical events since 1950. Only one of those incidents — the Arab-Israeli War in 1973 — caused “lasting damage” that still weighed on stocks a year later, he said.
“So, what’s happening now suggests that investors believe that history is a guide,” Hanke said. “They see signs of danger, but somehow think that they will escape, as they have in the past. I’m not so sure that they are right.”
The flagship US stock index, the S&P 500, has rallied almost 2% since June 13, the day that Israel attacked Iranian nuclear and military sites. It closed at nearly 6,100 points on Wednesday, putting it within touching distance of a record high.
The rebound came despite the US bombing three Iranian nuclear facilities on Sunday, and Israel and Iran accusing each other of breaking a Trump-brokered ceasefire this week.
Hanke, a former economic advisor to President Ronald Reagan, was the president of Toronto Trust Argentina when it was the world’s best-performing market mutual fund in 1995. He co-authored a book published in May titled “Making Money Work: How to Rewrite the Rules of our Financial System.”
The veteran economist and commodity trader flagged several risks that investors appear to be shrugging off. Middle Eastern conflicts and the Russia-Ukraine war were still “up in the air,” and neo-conservatives “have their sights aimed at China,” he said.
“If that wasn’t bad enough, the Trump administration is engaged not only in a tariff war but in a multitude of dramatic policy changes that have created what I termed ‘regime uncertainty,'” Hanke said.
Hanke was describing a situation where individuals, investors, businesses, and other entities are so unsure of regulations, future government policies, and how the economy will fare that they delay long-term planning or investment.
“We have not witnessed regime uncertainty since Franklin Delano Roosevelt and the New Dealers in the 1930s,” Hanke said. “So, the current context is quite different than the other 19 geopolitical crisis episodes.”
Put differently, investors should be wary of assuming the stock market will swiftly rebound from this geopolitical shock as it has from many others, given just how uncertain the world is right now.
