US Stocks Seem to Prefer a Stalemate?

Two steps forward, one step back.  Or a ratchet.  A rom-com “will they, won’t they.”  Any of those metaphors can be used to describe US equity investors’ responses to the on-again, off-again news flow about the prospects for peace talks aimed at resolving the war in the Persian Gulf.  Stocks rally on even the faintest whiff that both sides will be holding discussions but barely budge when they are postponed or canceled.  Might we prefer stalemate to a solution?

At first glance, that question sounds ridiculous.  Of course we should prefer a lasting peace, one that reopens the Strait of Hormuz, ends hostilities, and reduces the potential for lethal regional conflicts.  Along those lines, we should also be encouraged when there appears to be progress toward those goals.  Hence, it is understandable that stocks ebbed when the first ceasefire was announced and rallied when hopes for peace talks came to the fore.  That’s quite straightforward.

However, the asymmetrical response to progress and the lack thereof is not as obvious.  Think of all the times – including the seemingly well-timed announcements – that some progress was announced and stocks rallied.  More likely, the progress was rumored or suggested, rather than tangible, but that mattered little to enthusiastic equity buyers.  Now think of all the news articles that either debunked prior reporting or noted that the rumored events had not come to pass.  Those were barely greeted with a yawn. 

Can we thus conclude that a prolonged stalemate peppered with periodic hopeful messages about progress is the market’s preferred scenario?  Seems ludicrous, but that seems to be the superficial response, at least for equity prices.  On Sunday, a reporter reached out and we had the following brief exchange:

Q: How [might] investors react to the attack [at the White House Correspondents’ Dinner]?  What signal does it send?

A: I don’t think that will be a market catalyst.  It could have been a tragedy, but it wasn’t.  The failure of the peace talks, which were hyped Friday and led to a rally, should be more concerning – though the recent pattern indicates that traders will probably shrug off the initial concerns when some other hopeful tidbit is offered to them.

Indeed, we saw a modest selloff in pre-market futures morph into a slight bump at the open, although it reverted to a very slight decline shortly afterwards.  The hopeful tidbit was an Axios report that Iran had laid out its desired points for a peace proposal.  Gee, imagine that!  Pardon my sarcasm, but it would seem as though that would have been a prerequisite to substantial talks, not a sudden revelation.  But that is the nature of how we interpret news.

Keep in mind that oil and bond traders are no longer abiding by the paradigm that we laid out above.  Oil futures have been trending higher as ship traffic through the Strait of Hormuz remains minimal at best, and bond yields have been ticking higher in response to the stasis.  It’s quite fair to note that stocks have been reacting positively to earnings, but when we have a key sector like semiconductors add nearly 50% in valuation in about a month, it tells us that something was probably being mispriced.  We have to wonder whether that was the case before, currently, or some of each. 

In any event, I hope for a lasting peace and a resumption of normalcy in global energy markets.  But I wonder how long stocks can continue to react positively to hopes for progress while ignoring a factual lack thereof.  Maybe we’ll get a clue on Wednesday when we have the amazing confluence of an FOMC meeting and four megacap tech earnings (Amazon (AMZN), Alphabet (GOOG, GOOGL), Meta Platforms (META), and Microsoft (MSFT)).  We’ll discuss that more over the next two days.  For now, we’ll deal with another yawn in stocks even as oil and bonds react in seemingly unfriendly ways for stocks.