The Iran Relief Bounce: Is This Time Different?
Plus, we’re having talks—or else
By
Spencer Jakab
The celebration over the Strait of Hormuz reopening faded over the weekend. Following Friday’s bounce, stocks are set to open lower while oil prices have retraced some of their losses. With Vice President JD Vance heading for Pakistan, it’s still unclear whether new talks on ending the war will even happen. President Trump is again threatening to attack Iran’s infrastructure if they don’t.
In Need of a New Playbook
The last time stocks acted like this, George Bush was president. George H.W. Bush, that is.
The tech-heavy Nasdaq Composite Index’s 13th consecutive gain on Friday is just one of several unusual features of the Iran relief rally. There’s a difference, though, between something being a rarity in traders’ playbooks and them needing to order a whole new one.
Markets have been acting oddly since the Covid-19 plunge, and there might be structural reasons for that. Before the pandemic, a rebound from a steep selloff usually was followed by a retest of the prior lows. Chris Watling, chief market strategist at Longview Economics, looked back decades at 15 similar non-bear market episodes and found that was the case almost 80% of the time.
Since 2020, though, no sharp pullbacks have matched that pattern. One theory he has is the growing importance of “multi-strat pod shops.” These are huge hedge funds that contain several smaller funds. They use borrowed money and have risk managers who keep them on a tight leash.
When returns suddenly turn negative, the pods are forced to take their lumps quickly and reduce risk. That provides a clean slate for the ensuing bounce.
There’s another big change that might be even more profound—a huge increase in retail trader participation. Millions of brokerage accounts were opened in 2020 and 2021, largely by young men, in a perfect storm of commission-free trading, boredom, stimulus checks and face-ripping volatility. They’ve become a force.
Charles Schwab Chief Investment Strategist Liz Ann Sonders said on the Excess Returns podcast last week that this cohort—one she distinguishes from other, traditional individual investors—makes up a substantial chunk of stock trading many days. Combine their buy the dip, chase the rip behavior with professional investors like commodity trading advisers who already followed momentum strategies, and bounces have a lot more oomph these days.
They say that the four most dangerous words in investing are “this time is different,” but the way stocks react to scary news might really have changed.
Selloffs like the one following Covid shutdowns, Liberation Day and hostilities in Iran are even more brutal. The bounces, as we’ve just seen again, are also a lot quicker.
They can’t even really be called “recoveries.” The economic damage or threat from those events lingered far longer than it took equity indexes to reach fresh highs. With plenty of uncertainty unleashed by the ongoing energy shock, that’s certainly the case today.
We’re not in Kansas any more.
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