Buy the Rumor, Buy the News

(Today’s Soundtrack: John Lennon and Yoko Ono)

There’s obvious enthusiasm for what appears to be a lasting cessation of hostilities in the Persian Gulf and a re-opening of the Strait of Hormuz.  This is obvious from the -10% move in crude oil futures and an 8-basis point drop in Treasury yields across the curve.  Stocks, of course, have been pricing in this result for the past three weeks.  Arguably, the move in stocks would have been even greater if they weren’t already up about 10% in anticipation of today’s news.

We can quibble about some of the specifics.  Has Iran really agreed to never close the Strait again, as the President asserted in a Truth Social post at 10:40 this morning?   Is the US continuing to blockade Iran until a deal is complete?   Frankly, the specifics don’t really matter today.  These comments sound like a declaration of victory by the President, regardless of what may or may not have been accomplished.  And, as noted, for the first time in weeks, bonds and Fed Funds futures seem to agree wholeheartedly.

Barring an immense implosion in stock prices this afternoon, which seems highly unlikely amidst 1.5% rallies in the S&P 500 (SPX) and Nasdaq 100 (NDX) this morning, both indices will complete three straight weeks with upward moves of 3% or more.  There are not many precedents for streaks of this type, particularly for SPX. 

Since 1980, there have only been two instances when SPX had three straight 3% up weeks: August-September 1982 and May-June 2020.  Both came after significant bear markets.  The latter occurred amid the massive monetary and fiscal stimuli that resulted from the Covid crisis and paved the way for the bull market that we enjoy today.  For better or worse, I’m old enough to remember the former event.  I was finishing a summer internship at the long-defunct L.F. Rothschild, and I remember the explosion of enthusiasm when the Volcker Fed signaled that they would ease their inflation-fighting stance that had led to years of double-digit short-term rates.  That was a declaration of victory over the war against inflation, which had led to a series of bear markets in the late ‘70s and early ‘80s.

There are far more examples of similar streaks in NDX.  That makes sense, considering that NDX is typically more volatile than SPX.  The first occurred in 1990 during that period’s semiconductor-led tech rally.  There was a four-week run in February 1991 when Operation Desert Storm entered Kuwait.  Several occurred during the internet bubble.  The first was another four-week jump in November 1998 that resulted from the monetary stimulus that followed the Long Term Capital Management failure.  A year later, a five-week jump occurred in November 1999, which was followed by another three-week jump to close 1999 thanks to monetary stimulus as Y2K fears mounted.  The next was in early March 2000, which was the absolute peak of the dot-com bubble.  Subsequently, we had bear market rallies in September 2000, and October 2001 (after 9/11).  The last occurrence before now was in October 2002, when the post-dotcom swoon ended. 

Neither of the SPX examples seem to fit, though the 1991 example and several through the ’98-’00 period fit for NDX.  That said, I’m not sure that I’m all that comfortable with precedents from the dotcom bubble.  They are rather inauspicious, to say the least; but in fairness, only one led to the market’s imminent demise.  I believe there is a finite, though low, probability that this move represents a so-called “blowoff top,” when a final flurry of almost manic buying propels stocks or markets to a level they can’t sustain.  But that would be raining on today’s parade.  For now, at least, let’s let good news be good news, even if much of it was already priced in.