By about noon today, a few hours into the “cease-fire” in the middle-east, the major stock market indices are up about 1% on the news.

Why? Did the war have any tangible effects on the US economy? Oil futures increased, which would have an effect, but the oil market reacts to world events in very similar ways to the stock market.

To understand this reaction we need to see what decides the price of a stock. The price will change when future earnings change or when the amount (multiple) that people are willing to pay for those earnings change. Typically this is shown with the formula P = E x M.

To keep things simple, in this case, it looks like people had thought future earnings might be affected. I assume the reason would be that if the conflict spiraled into a larger war it could be disruptive to the US economy. I assume, again, that “disruptive” would mean a change in oil production in the region.

This is likely partly an emotional over-reaction because war has normally been considered “good” for the US economy. People influence their investing with their intangible bad feelings about the conflict. This makes sense but is good to understand to see what really goes on in the market.