Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Why Bull Markets Ignore Geopolitical Shocks and What It Means
Transcript
- Lucas: So the S&P 500 is hovering around 7,500, the Dow just crossed 51,500, and yet over the weekend we get headlines that Iran has reportedly closed the Strait of Hormuz again. You would think that would rattle the market. Luna: Right, I mean that strait handles about 20 percent of the world's oil. If that's disrupted, oil prices spike, shipping costs jump. But futures this morning are barely blinking. Lucas: Exactly. And that's the pattern I want to drill into today — why bull markets, especially this one, seem to shrug off geopolitical shocks. It's not that investors are naive. It's that there's a historical playbook for this, and the data keeps confirming it. Luna: So what's the playbook say about the Strait of Hormuz specifically? We've seen this movie before — Iran threatened it in 2019, 2012, 2008. Lucas: Right. The typical pattern is a one-to-three-day selloff in energy-sensitive sectors — airlines, shippers, some refiners — then a recovery as traders realize that either the disruption is temporary or the strategic petroleum reserves get tapped. The broader market usually takes about five sessions to fully price the event and move on. Luna: So you're saying if this stays a headline and doesn't become a real blockade, markets just look through it? Lucas: That's the historical evidence. And to back it up, look at the Vanguard Growth ETF — ticker V-U-G — it's up 2 percent in the last five days, even with this news breaking. ARKK is up 6 percent. Small caps, the Russell 2000, slipped about 0.9 percent, but that's more about the rate environment than Iran. Luna: So the market is basically saying: the Fed matters more than Tehran. And the Fed is staying put. Lucas: Exactly. The Fed's interest on reserve balances rate has been flat at 3.65 percent for weeks. That's a signal that monetary conditions are stable. When the cost of money is predictable, risk assets tend to look through geopolitical noise. Luna: Can we look at some historical comparisons? Because I feel like investors have short memories about this. Lucas: Sure. Take August 1990 — Iraq invades Kuwait. Oil doubled in three months. The S&P 500 dropped about 17 percent from peak to trough. But here's the kicker: the market bottomed in October 1990, before the Gulf War even started. By the time the actual bombing began in January '91, stocks were already up 20 percent from the low. Luna: So the worst selling happened when the uncertainty was highest, not when the bullets started flying. Lucas: Exactly. Fast forward to 2014 — Russia annexes Crimea. The S&P 500 dipped about 2 percent in a week, then recovered within three weeks. The European indexes took a bit longer, but the U.S. market barely flinched. Luna: What about something like 9/11? That was both a geopolitical shock and a domestic attack. Lucas: That's the outlier. The market was already in a bear phase — the dot-com bust was underway — but even then, the S&P 500 bottomed about a week after trading resumed and then rallied 20 percent over the next two months. The pattern holds: initial panic, then a snapback once the policy response becomes clear. Luna: So for today's investor, is the lesson: don't sell on the first headline? Wait a few days? Lucas: That's a good rule of thumb. If you want to get more specific, the data suggests that if you sell on a geopolitical shock and buy back in three to five sessions, you've usually sold at the bottom. The Vanguard Growth ETF data from the last decade shows that the average drawdown from geopolitical events is about 3 to 4 percent, and the recovery happens within two weeks. Luna: But doesn't this depend on whether the shock actually changes the economic outlook? I mean, if Iran actually blocks the strait for weeks, oil goes to $150, that's different from a brief closure. Lucas: Absolutely. The key variable is whether the shock is transient or structural. A temporary blockage is a buying opportunity. A permanent disruption to global supply chains or energy flows changes the discount rate, and that can reset valuations. But look at the headlines — Iran closes the strait, then Vance heads to Switzerland for talks. There's a diplomatic off-ramp being built. That's a transient scenario. Luna: And the market is pricing that off-ramp, not the worst case. Lucas: Right. Which brings me to a broader point: bull markets tend to be resilient because the underlying economic fundamentals — GDP growth, employment, corporate earnings — are usually positive. Right now, real GDP growth annualized is 1.6 percent, up from 0.5 percent a year ago. That's not a boom, but it's stable. And corporate earnings are still growing, albeit slowly. Luna: So the bull market is basically saying: I trust the economy more than I fear the headline. Lucas: That's the framing I'd use. And if that's the case, then the smart move for most investors is to stay invested and maybe use the volatility to rebalance, not to flee to cash. Luna: You know, talking about trust and staying invested, it reminds me of something about this podcast. We deliberately don't run ads on these episodes. And I think that's part of why listeners trust the perspective we offer. Lucas: Yeah, it matters to us. We don't want a third party shaping the conversation. If you find value in that approach, and you want to support it, there's a link — buy me a coffee dot com slash fexingo. That's it. No pressure, no perks, just a way to keep the show ad-free. Luna: And it helps us keep doing what we're doing. So back to the Strait of Hormuz — what should the average listener do if they're nervous right now? Lucas: I'd say three things. One, look at your portfolio's exposure to energy-sensitive sectors. If you're overweight airlines or shipping, maybe trim a little. Two, check your cash allocation. If you have a three-to-six-month emergency fund, you're fine. Three, and this is the most important: don't make a portfolio decision based on a headline. Wait three sessions, see how the story develops, then reassess. Luna: So the three-day rule. I like that. And for people who are more active, is there an opportunity in the dip? Lucas: If you have a long time horizon, geopolitical selloffs are often good entry points. The Vanguard Growth ETF — up two percent in five days — that ship may have sailed for this event. But if you look at small caps, the Russell is down 0.9 percent. That could be a tactical opportunity if you believe the economic data holds up. Luna: And what about bonds? Do geopolitical shocks typically drive a flight to Treasuries? Lucas: Often, yes. But the ten-year Treasury yield is already around 4.2 percent, and the Fed is on hold. So the flight to safety bid might be muted this time because yields are already relatively attractive. I'd watch the two-year yield more closely — if it drops sharply, that signals the market is pricing in a Fed cut due to geopolitical risk. That hasn't happened yet. Luna: So the bottom line: don't panic, wait three days, and if you're a long-term investor, consider adding to positions on the dip. Lucas: Exactly. And if you want a historical benchmark, the average geopolitical drawdown in the S&P 500 since 1980 is about 4.5 percent, and the average recovery time is 22 trading days. So even if this turns into a 5 percent dip, it's likely a buying opportunity, not the start of a bear market. Luna: That's a solid framework. Let's see if the next few days prove it out. Lucas: We'll be watching. And as always, we'll come back to it if the data changes.