Another Day, Another Rally.  Reason Not Required?

This morning, I was asked why stocks resumed their rally after pre-market futures had traded in a generally sideways manner.  My answer, perhaps a bit flippant, was “at this point, do we really need a reason?”  This is the beauty of a momentum-driven rally.  As we’ve noted before, when momentum rules, fundamentals are optional.  Price action, not the underlying justification for those prices, is all that’s important.

Once again, stocks are basically expressing their view that the war in the Persian Gulf is all but over.  Indeed, the ceasefire appears to be holding, but at the risk of minimizing the human costs, the market reaction to the war was never really about the shooting; it was about the closure of the Strait of Hormuz.  Stock, bond, and commodity markets reacted to the economic impact of the closure, not the hostilities themselves.  If ships aren’t moving through the Strait, then neither is oil, gas, fertilizer, helium, or anything else, creating a supply shortage that results in higher prices. 

As we pointed out most recently yesterday, oil futures are about $30 higher and 10-year Treasury yields are about 35 basis points higher than they were when the missiles started flying.  In theory, those should negatively impact stock valuations.  But again, when momentum rules, it is implicit that valuation is taking a backseat.

Perhaps the motivation for the advance is coming from the President’s comments in an interview with Fox Business that aired this morning, where he stated that the war is “very close to over” because “I think they [the Iranians] want to make a deal very badly,” and that the “stock market is going to boom, it’s already booming.”  The market didn’t initially react after the interview aired, which in some ways is unsurprising.  The stock market is already booming, and the reason is because equity investors have already been effectively pricing in an imminent end to the hostilities, if not the hope that they’ve already ended.  As for the idea that Iran is eager to make a deal, we have heard this before:

Source: X

Admittedly, the author of the above post is highly partisan, but the post itself is factual.  We have received repeated assurances that a deal is imminent, yet the two sides are at best stalemated with the blockade remaining in place.

Frankly, the market’s response to reports of an imminent deal is quite similar to traders’ motivations to buy dips and chase rallies.  If something is working, why shouldn’t people keep doing it?  If stocks rally on a report that a deal is imminent, why wouldn’t that continue?  At this point, it’s not necessary to get a deal, only to receive continued reassurance that one is just around the corner.  In fact, could it be the case that we should prefer the notion that talks are continuing to an actual treaty, since the latter would complete the second part of “buy the rumor, sell the news?”

Right now, it’s not about whether there is actual progress in the peace talks, it’s about whether we can reasonably hope that there might be progress in the peace talks.  Vibes are more powerful than reality.  And that’s reason enough for the rally to proceed apace, at least for now.