An attack on an American destroyer and commercial vessels in the Red Sea on Sunday has the danger of reigniting market concerns about an expansion of the war between Israel and Hamas. This attack could potentially complicate the outlook for a surge that saw U.S. equities reach a new closing high for the year last week.

The United States Department of Defense (Pentagon) stated that it was aware of reports involving assaults on an American warship and commercial vessels in the Red Sea on Sunday. Meanwhile, the Houthi group in Yemen claimed that they had struck two Israeli vessels in the vicinity with drones and missiles.

Additionally, on Sunday, a military official from the United States of America stated to Reuters that the United States carried out an attack in Iraq in the name of self-defense against an “imminent threat” at a drone staging location.

Fears that the Israel-Hamas confrontation might escalate into a more significant battle that includes the United States of America and other regional actors like Iran are likely to be stoked as a result of the recent events. Concerns of this nature were more prevalent following Hamas’ attack on southern Israel on October 7, although they have since faded.

During trading in Asia on Monday, futures for the S&P 500 index dropped by 0.2%, Brent oil futures briefly rallied before falling by 0.8% to $78.27 per barrel, and gold reached a new all-time high of $2,111 per ounce.

As the situation escalates, Quincy Krosby, chief global strategist at LPL Financial, stated that some investors may decide to cash out on the current increase in stock prices. Several factors contributed to the over-nine percent increase in the S&P 500 during November. These factors included evidence of lowering inflation and anticipation that the Federal Reserve would finish raising interest rates. Over the year, the index has increased by about twenty percent, reaching a new closing high of 4594.63 on Friday, 2023.

She stated that “the market is sensitive to any expansion of this conflict as well.” “I believe that active managers, regardless of the circumstances, are more likely to secure their gains if this is a precursor to a more complicated military conflict that involves the United States.”

As a result of previous increases in global tensions, investors have been inclined to seek refuge in well-known assets such as gold, Treasury securities, and the United States dollar. Indications that the conflict in the Middle East is intensifying could raise oil prices, which have been falling for the past few weeks.

According to Phil Orlando, chief stock market strategist at Federated Hermes, West Texas Intermediate crude prices might reach between $80 and $90 per barrel. Orlando stated that escalating tensions in the area could cause these prices to increase.

The changes occur at a time when investors are focusing their attention on issues that have the potential to influence stock prices in the weeks ahead. Those who argue that a slowing economy would prevent the Federal Reserve from raising interest rates further and perhaps loosening monetary policy sooner than expected may find that a report on employment in the United States, which is scheduled to be released on Friday, might support their argument.

The Federal Reserve’s meeting to discuss monetary policy on December 12–13 is another potential catalyst. Seasonal considerations, such as selling tax losses and the Santa Claus rally, are other potential precipitating variables.

As a result of an increase in international tensions, Orlando estimates that the S&P 500 might tumble by “one or two hundred points.”

“There’s no question this represents an opportunity for investors to take profits,” said the economist. “However, I’m still convinced the index ends the year at 4,600.”