On the Iran Flare Up

Ever since the US and Iran signed a purported 60-day peace deal buying time for discussions on Iran’s nuclear program and the Strait of Hormuz, the “ceasefire” hasn’t fully ceased fire. More ships crossed the Strait, but attacks reportedly continued and negotiations hit stumbling blocks. Then, on Tuesday, the US revoked a temporary waiver allowing Iran to sell oil unsanctioned. Strikes on Iran followed overnight, and President Donald Trump declared the ceasefire over on Wednesday. Yet markets’ reaction wasn’t huge. US stocks fell a little (-0.2%), European stocks fell more, and oil’s “spike” saw it rise to benign levels below $80 per barrel—far off early April’s highs.^[i] This underscores what we said when the peace deal first materialized: Whether or not it holds, markets have largely moved on.

In this way, the war is a lot like last year’s tariffs. The initial shock hit sentiment—and markets—as stocks worked through all the worst-case scenarios. With tariffs, that resulted in a swift, steep correction (a sentiment-induced -10% to -20% drop) as markets considered the possibility of a full-blown trade war wrecking global GDP. With the war, we got a mini correction as stocks wrestled through forecasts of severe energy shortages and rationing if the Strait of Hormuz stayed shut.

And then, in both instances, we got sharp recoveries well before most expected them—and well before things outwardly improved. When stocks started recovering from the tariff shock, the Liberation Day levies were delayed but not dead. When markets started rallying in March—and when oil started falling a week or so later—the Strait was still shut. But in both cases, there were kernels of evidence worst-case scenarios wouldn’t come true. That is all generally stocks need: solid reason to believe that whatever happens, it won’t be as wretched as what they already priced in. And once that kicks in, subsequent developments have steadily less influence on returns.

Global stocks hit their wartime low March 30. Since then, through Tuesday’s close, they rose 16.8%, surging past prewar highs.^[ii] At the low, the Strait was still closed. There was no “ceasefire.” But there were glimmers of relief as Energy suppliers started working around the obstacle. Increased pipeline use, higher production outside the Persian Gulf, more US oil exports and other nuggets indicated the world would still get the energy it needed. Countries dependent on Middle Eastern energy supply, like Japan, found new suppliers. Strategic reserve releases didn’t tame oil prices but bought time for adaptation. And so stocks rallied—and oil fell—as ceasefire attempts came and went and Strait traffic remained at a trickle despite its occasional official “opening.” Neither good nor bad news seemed to mean much for markets.

This is all standard behavior. Stocks don’t wait for clarity. They completed their recovery (and then some) well before the now-maybe-busted peace deal appeared in mid-June. They weren’t pre-pricing a peace deal—they were pre-pricing the high likelihood that whatever happened with the war and the Strait over the next 3 – 30 months, it would be better than all the energy shock catastrophes envisioned in March. Same goes for oil. Brent crude closed at $88.64 per barrel on June 12, the last trading day before the potential 60-day pause hit headlines.^[iii] That was up from prewar levels but miles below April 7’s high. As we write, despite continued attacks on tankers, it is around $78.^[iv] Markets already told you sufficient global supply doesn’t require the Strait being open and free tomorrow.

As for European stocks’ more pronounced volatility, we wouldn’t read into it. Sentiment hit Europe harder as investors fought the last war, in this case, 2022’s feared oil and gas shortages. European nations are filling gas reserves for winter, and folks there are on edge over the prospect of doing so at higher prices. Renewed attacks hit that nerve harder, understandably. But all those fears proved false in 2022, and European gas prices today remain light years below 2022’s highs. Higher volatility there simply indicates a higher wall of worry for stocks to climb.

So stay cool. Headlines can spur short-term volatility, but over time, markets look through them and weigh what is likely to happen over the next 3 – 30 months. We have already seen Hormuz and the war likely aren’t significant factors for this, as markets pre-priced those factors to a large extent. As stocks continue fathoming a fine future, this bull market likely climbs onward.