- All three major US stock indexes have recovered to pre-war levels and pushed higher — the Magnificent 7 gained $2.5 trillion in market cap over a single eight-day stretch — even as Hormuz remains effectively closed and oil trades near $98 a barrel.
- The dominant investing thesis is the “TACO trade” — Trump Always Chickens Out — with investors betting the White House will reverse any policy severe enough to tank markets, exactly as it did during last year’s tariff turmoil.
- Four of the S&P 500’s five biggest single-day gains this year came during the war itself, as retail investors, short-covering hedge funds, and momentum algorithms all treated each selloff as a clearance event.
- Oil commodities traders at firms like DV Commodities describe a market where “real and fake” information are nearly indistinguishable, social-media posts drive price swings, and momentum is the primary signal — even as physical supply data points to worsening fundamentals.
What Happened?
Despite an ongoing US naval blockade of Iranian ports, a Strait of Hormuz largely closed to commercial traffic, oil near $100 a barrel, and peace talks that collapsed this week before they even began, US equity markets have staged one of their most defiant rallies in recent memory. Stocks fell sharply when the war began in late February, pushing the Dow and Nasdaq into correction territory — then snapped back with extraordinary speed. The recovery wasn’t initially driven by optimism that the war was ending: data showed it was technical at first, with hedge funds unwinding short positions and trend-following algorithms adding momentum. But it quickly became self-reinforcing. A 30-year-old Amazon delivery driver in Dallas bought Robinhood shares days after the attack began. A civil engineer in Alabama reflexively shifted 10% of his index fund holdings into a triple-leveraged Nasdaq ETF when the correction flashed on his screen. A Manhattan hedge fund manager called it “Liberation Day” and loaded up on Tesla, Amazon, and Oracle.
Why It Matters?
The wartime rally reveals something important — and potentially dangerous — about current market psychology. A generation of investors has been trained by experience to treat dips as opportunities: Covid, tariff wars, the 2022 selloff have all resolved in favor of buyers. That conditioning, combined with the TACO trade thesis that Trump will reverse any policy that materially hurts markets, has created a reflexive buy-the-dip posture that operates almost independently of fundamentals. Even professional oil traders acknowledge that “real and fake” information are nearly indistinguishable in this environment and that price momentum is the dominant input. This works beautifully when bad news is eventually resolved. It becomes dangerous when the market is so conditioned to discount crisis that it fails to price in scenarios where the bad news doesn’t resolve — where Hormuz stays shut longer, oil stays elevated, or peace talks collapse for good.
What’s Next?
The rally’s sustainability hinges on earnings continuing to support double-digit profit growth projections and on some path toward Hormuz reopening before energy costs transmit more broadly into inflation. With oil near $100 and US gas prices above $4 a gallon for the first time in nearly four years, the window for “higher-for-longer energy without economic damage” is narrowing. As Nationwide’s chief market strategist put it: “Technical rallies have their limitations, and a shift in investor attention to fundamentals is needed to sustain the rally.” For now, the buyers aren’t waiting. “It doesn’t matter why it goes down — I buy more,” one retail investor told the Journal. That psychology is driving markets. Whether it survives contact with the next wave of bad news is the question.
Source: The Wall Street Journal
