This week featured the once-usual pattern: overnight US index futures were lower thanks to dips in overseas markets and higher crude futures, but then came steadily off their lows despite lackluster economic data and oil taking another leg higher as the morning wore on. That led to a brief flirtation with unchanged levels before modest profit-taking returned to the forefront. Once again, equity traders are more concerned about good vibes and positive momentum than geopolitics.
We noted yesterday that even as stock traders were rejoicing in the prospect of a 14-day ceasefire, bond traders were unenthused, and oil’s drop, while quite substantial, mostly returned those futures to levels that prevailed about two weeks ago. Today, as reports emerged that the Strait of Hormuz remained largely closed to ship traffic while the UAE, Kuwait, and Bahrain were struck by Iranian attacks, oil prices rebounded substantially – about 5-8%, depending on the specific contract – but stocks shrugged. Obviously, the concept of the ceasefire is preferable to its execution.
Remember the market’s reactions to the prior ceasefire announcements. The first one, a 5-day unilateral pause announced before the open on March 23rd, led to a 1.15% rally in the S&P 500 (SPX) and a 10.3% drop in May WTI futures (CL). The second, a 10-day extension of the prior pause, announced after the close on March 26th, when SPX had fallen by 1.74% and crude rose 4.61%, led to a further 1.67% drop in SPX and a further rise of 5.46% in CL the next day. Yesterday’s bilateral ceasefire yielded a 2.51% jump in SPX and a stunning 16.41% plunge in May CL futures.
For perspective, on the last trading day prior to the first 5-day pause, SPX closed at 6506.48 and May Crude closed at $98.00. That means that as of yesterday’s close, crude had fallen by 2% and SPX had risen by 4.24% over that period. Considering that oil has been FAR more volatile than stocks over that period, that seems like reasonable evidence of an asymmetric response to the geopolitical events. That should surprise no one, even if the disparity is stark.
For additional reference, the 2-year Treasury yield dropped from 3.90% to 3.79%, the 10-year yield dipped from 4.38% to 4.29%, and expectations for rate cuts in 2026 improved from a 29% chance for a hike to a 27% chance for one cut. At the end of February, the 2-year yield was 3.38%, the 10-year was 3.94%, and Fed Funds futures were pricing in 2 rate cuts plus a 44% chance for a third. Considering that significant shift in the yield curve over that time, along with the jump in May crude from $66.13 to $96.03 – a 45% leap – SPX’s 1.4% drop from the end of February through yesterday is rather paltry.
Coincidentally, today is the one-year anniversary of the post-“Liberation Day” rally that pushed SPX up by 9.5%. This memory is firmly in investors’ mindsets and is a key rationale for why stocks retain a high level of residual optimism even as key factors that influence equity pricing have moved in the wrong direction. To be fair, stocks are meant to be forward-looking while commodities are certainly more rooted in the here-and-now of supply and demand (bonds are somewhere in between), but stock traders have become predisposed to look for a brighter future ahead. The lessons of prior dips, and especially last year’s, remain deeply embedded in the stock market psyche.
(And in another case of current events overtaking my ability to write quickly, stocks have caught a second wind and oil prices are off their highs after reports emerged that Israel will begin negotiations with Hezbollah. This was a clear sticking point in the initial phase of the current ceasefire.)