Why Are Markets Ignoring Scary Headlines?
Since mid-April, the stock market has confounded the bears and steadily rallied (and turned positive YTD) despite a very consistent stream of, on the decidedly negative headlines, risks and threats not just to the markets but to the U.S. economy. That continued last week with markets largely ignoring the attack on Iran by Israel (a situation global powers have been trying to prevent for 10+ years).
The gap between what we (and investors and clients) are reading daily in the mainstream and financial media is wide and getting wider, and I wanted to take a moment to explain why none of these headlines have materially impacted stocks, so that we can 1) Explain this market resilience to clients and 2) Know why markets are ignoring these risks, so that if something changes and markets can’t ignore them anymore, we’ll know about it.
Scary Headline 1: Iran/Israel military conflict. This is the latest scary headline to confront investors as Israel launched a direct and comprehensive attack on Iran, targeting Iran’s nuclear facility and senior military leadership. This campaign will likely last for several more days and weeks, essentially putting the two countries in a defacto war.
On its surface, this situation is potentially extremely negative as it risks plunging the Middle East into a regional war if more countries get involved and raises the risk Iran attacks U.S. assets in the region, potentially leading to a direct U.S./Iran conflict.
Why don’t investors care?There are two reasons this event didn’t cause more of a negative reaction. First, Iran’s military capabilities apparently have been materially degraded, likely limiting their ability to wage war against Israel. Given Iran’s weakened state (which is the result of years of sanctions and targeted military operations). Second, given existing sanctions, Iran is not a major global oil player right now and given likely OPEC production increases and Saudi Arabia’s dominant market share, the conflict is unlikely to dramatically increase oil prices.
If either of those assumptions change (that a broader war will occur or oil prices will sustainably rise), then the market will care about this conflict (and it will be negative for stocks).
Scary Headline 2: Never-ending tariff threats. The beat goes on with President Trump’s tariff threats as the administration sent letters to trading partners warning them of the July 9 reciprocal tariff expiration. So, there is still very legitimate risk we get higher tariffs on major trading partners that could boost inflation and hurt growth.
Why don’t investors care?TACO. The markets have become extremely complacent with tariff and trade risks and are now largely ignoring every tariff threat or trade utterance, dismissing it as bluster and comfortable in the idea that none of it will actually happen, and tariff rates won’t move higher than they are now (at least not on the things that actually matter to the U.S economy).
TACO has become a de facto “mute” button for most of Trump’s most dramatic or absurd threats. Markets will care (a lot) about this if/when TACO is proven false. The next chance for that to occur is ahead of the July 9 reciprocal tariff deadline. But at this point, markets are so convicted in TACO that it’s going to take a sustained tariff increase to shake the belief that, before too long, Trump will back down.
Scary Headline 3: U.S. debt and deficit crisis. The U.S. fiscal situation continues to deteriorate, and the “Big, Beautiful Bill” threatens to make it even worse with intense spending increases, tax cut extensions and little-to -no spending reductions to offset them. Given that, it’s not impossible that we see a “Liz Truss” moment in global markets once investors have an idea what the final bill will look like (as a reminder, UK PM Truss proposed an absurd UK budget and UK GILT yields spiked horribly, the pound and UK stocks plunged and Truss was voted out within a few weeks, although that last part obviously won’t happen here).
Why don’t investors care?The 10- year Treasury yield. That’s the barometer for the global bond market’s worries about the U.S. fiscal situation and for all the angst and concern in the mainstream media, the bottom line is the global bond markets are not yet concerned about the U.S. fiscal situation, and that’s an important and clear signal to investors that they don’t need to be worried about it either right now. If the 10- year yield begins to creep towards and through 5.00%, that will be a signal that the global bond markets are starting to worry about the U.S. fiscal situation and at that point, markets will care about deficits and debt, a lot! (and we should expect stocks to be sharply lower).
Scary Headline 4: Economic slowdown. There’s a growing body of economic data that’s implying the U.S. economy is losing momentum, including jobless claims, the ISM PMIs (which are both below 50) and the monthly jobs report, and that’s reasonable considering 1) Still-high interest rates and 2) Still-elevated tariff uncertainty and policy volatility.
Why don’t investors care?Because it’s not bad enough yet. The U.S. economy has twice proved more resilient than expected over the past five years (first with Covid and then with the Fed rate hike campaign), and the result is investors have given it the benefit of the doubt. Meanwhile, none of the data is bad enough yet to reasonably increase slowdown concerns. Instead, it still could all just be pointing to a soft landing.
If economic data deteriorates further, however, that will change. And the more the summer moves on, the more we will see the impact of policy chaos and tariff whiplash. If we see the ISM PMIs stay below 50, jobless claims move above 260k and towards (or above) 300k and monthly job growth turn negative, we will see economic concerns spike.
So we continue to maintain a conservative mix in our investments, until we are beyond the potential risks of the market. I don’t think this is long.