President Donald Trump is facing significant challenges in his efforts to influence financial markets amid escalating tensions in Iran, as evidenced by a notable downturn in stock indices. The S&P 500 experienced a 1.7% decline on Friday, marking its fifth consecutive weekly decrease, the most prolonged slump since 2022. This decline signals a stark reduction in investor confidence regarding a swift resolution to the ongoing conflict in Iran. Since the U.S. military actions against Iran commenced on February 28, the S&P 500 has dropped approximately 7%, while the Dow Jones Industrial Average has experienced a nearly 1.7% decline, shedding almost 4,000 points in the process. This downturn indicates a technical correction, with the index now more than 10% below its recent peak.
Moreover, the tech-heavy Nasdaq composite has slipped further into correction territory, closing down 2% and reflecting a 13% drop from its record high in October. Concurrently, oil prices have surged substantially, with U.S. crude topping $100 per barrel and global Brent crude reaching around $114 per barrel. The yield on the 10-year Treasury note rose to 4.4%, a level not seen since the previous summer. Some energy stocks, including Exxon, are nearing all-time highs amidst the turmoil.
Shortly after the stock markets closed on Thursday, Trump announced a temporary pause in attacks on Iranian energy sites for ten days. However, this announcement had little impact on the markets, which had seen an initial boost when he declared “productive” discussions with Iranian representatives just days prior. Adam Turnquist, chief strategist at LPL Financial, emphasized that the market is now seeking tangible details and resolutions rather than mere statements from the administration.
This situation contrasts sharply with Trump’s earlier tenure, where he adeptly influenced markets through fluctuating tariff announcements. His pattern of announcing tariffs that would later be retracted became known as “TACO” — an acronym for “Trump Always Chickens Out.” Experts suggest that the current geopolitical situation is too complex for a quick return to pre-war market conditions. The disruption to oil and gas supply chains is significant, leading to elevated transportation costs and persistent high oil prices.
The impacts of rising oil prices are already being felt in the broader economy and consumer spending patterns, complicating the Federal Reserve’s monetary policy options. Higher oil costs are likely to contribute to ongoing inflation concerns, diminishing the likelihood of interest rate cuts. In fact, the chances of a rate hike are now surpassing those of a reduction before the year’s end.
Even if hostilities were to cease, experts caution against expecting markets to rebound to previous levels swiftly. Steve Sosnick, chief strategist at Interactive Brokers, indicated that disruptions in supply chains may result in persistent elevated oil prices, making it difficult for markets to revert to pre-conflict valuations.
Nonetheless, Trump expressed little concern over the market’s recent downturn, claiming in a Cabinet meeting that oil prices had not risen as dramatically as he anticipated and predicted they would eventually fall back down.
Despite current challenges, analysts like Turnquist suggest that the outlook for earnings growth remains optimistic. However, if the situation in Iran drags on, it could further dampen consumer spending and business investment. The U.S. economy’s shift towards a service-oriented model as opposed to being oil-intensive may mitigate some effects of the current crisis, given the increased domestic oil production in the past decade.
Yet, prior to the conflict, stock valuations were already viewed as high. Any further declines in stock prices could make it increasingly difficult to return to the record levels seen before the escalation. Matt Maley, chief market strategist at Miller Tabak, voiced concerns that the risk-reward ratio for stocks is heavily skewed toward risk at this time. As the geopolitical situation continues to evolve, observers anticipate a further erosion of Trump’s ability to sway market sentiment, with complex global factors influencing investor confidence far beyond mere rhetoric.
