Is the Stock Market Wrong About the Iran War?
Is the Stock Market Wrong About the Iran War?
By:Ilya Spivak
Stocks are flush with optimism about ending the US-Iran war. Bonds, gold, and crude oil prices are not so sure.
- The stock market is trading as if the war in Iran is sure to end after a two-week ceasefire
- US PPI data paints an unexpectedly benign picture of inflation even as energy costs soar
- Gold, crude oil, and the bond market warn Wall Street optimism might be disappointed
Wall Street is powering higher after a heroic start to the trading week as traders embraced hopes that a two-week ceasefire in the war between the US and Iran will herald a lasting end to the conflict. Markets quickly brushed off weakness after the first round of talks foundered in Islamabad, betting this was only the first of many steps before a final deal.
The bellwether S&P 500 is on pace for a third consecutive week of gains, with cumulative rise of 10.4% from late-March lows. The index has erased close to 90% of the selloff from its peak in January. That puts it back within a hair of record highs. A similar picture is on display for the tech-tilted Nasdaq 100 and the small-cap Russell 2000.
The Iran war and inflation: less than meets the eye?
A dose of upbeat US economic data helped keep up traders’ spirits. Producer price index (PPI) figures showed that wholesale inflation was far steadier last month than analysists expected. The headline reading rose 0.5% in March, matching April’s result and undershooting forecasts calling a jump of 1.1%.
The broader uptrend in PPI since the advent of the Trump administration’s tariff policies continues, but its slope was due to steepen more than it has. A rise of 4% year-on-year made for the fastest wholesale price growth since February 2023. Nevertheless, that compared nicely to the 4.6% rise penciled in by economists.
Perhaps most strikingly, these benign-looking numbers appeared despite surging energy prices. The PPI report showed them jumping 8.5% month-on-month in March, making for an eye-watering rise of 11.3% year-on-year. It was surely tempting to interpret this as signaling that the Iran war need not scramble inflation trends and derail interest rate cuts.
Is the stock market wrong to cheer the US-Iran ceasefire?
Markets outside of US equities are curiously circumspect, however. The S&P 500 is now up 2.8% since the US first struck Iran on February 28, having been down as much as 6.3% at the peak of the “war trade” in late March. Only the US dollar shows something similar, trading down 0.95% having been up as much as 2.2% against its major counterparts.
By contrast, gold prices have only trimmed war-related losses from 17.6% at their peak to 8.5%. The yield on the benchmark 10-year US Treasury bond tells a similar story. It increased as much as 9.7% since the start of the war but rates have since moderated to a net rise of 5.2%.
The way crude oil prices have behaved is the most dramatic and seems to be most telling. The WTI benchmark was up as much as 58.6% since the war began to its peak on April 7. A subsequent turn lower has reduced the wartime premium to 26.7%. That is big improvement in just one week of trade. It is also nothing like the complete about-face in stocks.
When the war began, the markets delivered their verdict with one voice: a jump in oil prices threatened to unleash inflation and turn global central bankers hawkish. That sent stocks, bonds, and gold prices down together as the dollar rose. Now, diverging price trends warn that an overly optimistic equity market is setting up for disappointment.
Ilya Spivak, tastylive head of global macro, has over 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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