Two Saturdays ago, after the S&P notched a sixth consecutive weekly advance, I noted that although the streak felt anomalous, it really wasn’t in a statistical sense.
Historically, it’s not unusual for US equities to rise for half a dozen weeks straight. Nor, I went on, would it be especially unusual if the run of weekly advances continued.
So why does it — the rally — feel so damn extraordinary? Because of the geopolitical backdrop, obviously. The worst-case materialized in the Mideast. The US and Israel went to war with Iran, killed the Grand Ayatollah and plunged the region into what it’s fair to call the worst, if certainly not the deadliest, crisis in recent memory.
That’s no small feat: Lamentably, that area of the world’s defined by a never-ending succession of violent crises. The campaign to snuff out, for good, Iran’s ambitions on challenging for regional hegemony put critical infrastructure in harm’s way and closed the Strait of Hormuz, triggering modern history’s worst energy supply shock.
As a quick, but important, aside, I should note that the reality of the Iranian hegemony “threat” was overstated not so much in the context of Tehran’s efforts to encircle the Sunni powers, but certainly vis à vis Israel given the Israeli state’s nuclear arsenal and vastly superior military-intelligence capabilities.
The figure below shows you Dario Caldara and Matteo Iacoviello’s geopolitical risk index. As a reminder: It’s a news-based measure constructed by tallying newspaper articles “related to adverse geopolitical events” and expressing those articles as a share of all news.
As you can see, the Iran conflict’s on par with Vladimir Putin’s “special military operation” in Ukraine, the Iraq War and the Gulf War.
And yet, even during the height of the conflict, when Donald Trump seemed perilously close to launching a ground invasion, the S&P never even reached correction territory. And since bottoming in late-March, the benchmark managed to notch 14 new record highs.
Headed into a long holiday weekend in America, US shares were on track for an eighth consecutive weekly advance.
The updated figure above gives you some perspective. While not unprecedented, eight-week rallies are in fact rare, unlike six-week streaks. By my count — and this comes with the caveat that my Excel skills on these sorts of tasks aren’t expert-level — there are only six such episodes since 1998.
I’m writing this on Friday morning, and a bad session could snap the streak, but the fact that we’re even talking about this says quite a lot about i) the power of the AI rally, ii) modern market structure (more and more analysts are waking up, for example, to the role leveraged ETFs played in driving the semi surge) and, most relevant for our purposes, equities’ short attention span when it comes to geopolitics.
To dwell just one beat longer on a point that scarcely needs more attention, we’re in the middle of what energy analysts for decades described as an absolute worst-case scenario: The Strait’s been more or less closed for the better part of three months. While perhaps not immediately relevant for corporate bottom lines, it is relevant.
At the risk of coming across as insensitive or dismissive of genocide, this isn’t Gaza. We’re not talking about 70,000 dead Palestinians here. We’re talking about, as of mid-May, cumulative oil supply losses from the Gulf in excess of a billion barrels, on the IEA’s estimates. More than 14 million barrels per day is shut in.
When you step back and think about that, it’s a miracle crude’s “only” ~$100. Hell, 10-year breakevens are just 15bps higher than they were pre-war, and they’re 50bps lower than they were at the height of the Ukraine energy panic this time four years ago.
Who knows, maybe this’ll start to “matter” for equities the same way it’s (finally) beginning to hit home for bonds now that reporting season in the US is over. I suppose you can forgive equities for shrugging it all off given very robust earnings growth and the historic inflection in revisions.
The figures above, from Goldman, underscore just how rosy the profit outlook allegedly is. I say “allegedly” because forecasts are just that: Forecasts. Projections. Guesses, “educated” or not.
On Friday, ahead of what was widely expected to be a listless pre-Memorial Day trade in rates, BMO’s Ian Lyngen said, of the war, “we suspect the best outcome for Treasurys and risk assets would be further confirmation that the negotiations are ongoing and incremental progress is being achieved.” This is, by now, a cold hot war, so to speak.
In remarks quoted by Bloomberg, BNY Mellon’s Geoff Yu summed things up. “The market’s fully aware that headlines will remain volatile, and while oil needs to react for practical reasons, equities have probably moved on.”
