Can anything stop the bull market in US equities? Apparently not.
And certainly nothing as minor as a war in the Persian Gulf, even if it has led to the blockage of the Strait of Hormuz.
This, as everybody now knows, is the chokepoint for roughly 20% of the world’s requirement of crude oil, liquefied natural gas (LNG), the fertilisers needed to help grow our food, along with the helium so vital for the manufacture of semiconductors.
Yet this week, both the S&P 500 and tech-heavy NASDAQ hit all-time highs, both on a closing basis and intra-day.
Just a few weeks ago, in late March, the S&P was close to 6,300, dropping to lows last seen in early August.
That represented a fall of around 8% from the end of February, just before the US and Israel launched their attacks against Iran.
So, a drop of 8% in little over a month, followed by an 11% rally in just over a fortnight.
Surely, this bull market is a wondrous thing.
Why should anyone be surprised? Since October 2022, every significant market dip has been bought, and the result has always been the same.
New highs get recorded as short sellers get carried out. Forget caveat emptor.
The only lesson learnt was to lever up and buy everything, especially tech.
Markets are always forward-looking, we’re told, and prices are a response to all the information currently available to the millions of stock market players.
So, investors are simply reacting to a straightforward fact that wars, at least hot ones, always come to an end.
In this case, a ceasefire was declared during the sixth week of the war.
Despite accusations by both sides that the ceasefire terms had been broken, the US and Iran entered negotiations.
Senior figures on both sides met officially for the first time in forty seven years.
While inconclusive, it sounds as if more talks are about to take place, and the consensus view in the markets is that these will prove successful, whatever that may mean.
After all, the Trump administration’s idea of a victory could look quite different from anything the rest of the world may find acceptable.
There’s also the fact that the Gulf States have been scarred.
It could take years to build back the energy infrastructure damaged during this war, particularly in Qatar, where its LNG production has been disrupted and destabilised.
Meanwhile, other countries around the Gulf don’t look quite so attractive anymore, whether for investors in Riyadh or influencers in Dubai.
In addition, Europe and Asian Pacific countries remain dangerously exposed not just to higher energy prices, but to the real danger of energy shortages.
In the meantime, the rally in equities continues. Technically, all the US majors are looking overbought at current levels.
They have risen too far too fast, suggesting that a pullback may be on the cards.
But it’s also possible that stock indices push higher from here, as FOMO plays its role in driving fresh buying from investors who feel they need greater exposure to record-breaking markets.
We saw something very similar with gold and silver back in January. And we all know how that ended.
(This is a fortnightly column by David Morrison. He is a Senior Market Analyst at Trade Nation. Views are his own.)
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