Israel is in the middle of the Middle East. Iran's Mullahs have been threatening Israel's existence since they overthrew the Shah of Iran in February 1979. There has been a covert war between the two since then. It turned more overt last year and escalated on Friday when Israel launched a preemptive strike targeting nuclear facilities (Natanz, Khondab, Fordow), military installations, and residences of senior officials in Iran. The strikes killed key Iranian military figures, including IRGC commander Hossein Salami and Armed Forces Chief of Staff Mohammad Bagheri, along with nuclear scientists and civilians (reports vary from 78 to 90 deaths). Iran reported damage to oil fields and gas production facilities.
The S&P 500 is now in the middle of the Middle East. The S&P 500 fell on Friday on the unsettling news out of the region but by only 1.13% to 5,976.97, which remains not far below the February 19 record high (chart). We anticipated this development in last Thursday's QuickTakes and recommended using any selloff in the stock market as a buying opportunity.
We also reiterated our view that the 10-year US Treasury bond yield should remain around 4.50% through year-end. Following last week's lower-than-expected CPI and PPI inflation reports on Wednesday and Thursday, bond yields fell a bit on expectations that the Fed might respond to the good news by lowering the federal funds rate sooner rather than later (chart). Yields rose a bit on Friday on news of Israel's attack on Iran, which caused the price of oil to soar. The Fed now has to worry about the inflationary consequences of President Donald Trump's latest round of threatened tariffs as well as the price of oil.
The latest war in the Middle East means that investors are facing a host of known unkowns. How long will the war last? Not long if Israel continues to knock out Iran's military assets. Crippling strikes against Iran's nuclear facilities haven't occurred yet. But Iranians living near these sites have been warned by the Israelis to run for the hills to avoid radiation released when the sites are bombed.
