The Iran War Isn’t Over — So Why Are Stocks Back Near Record Highs? The Cognitive Dissonance Explained

The New York Stock Exchange floor appeared to be just like any other decent day on a Tuesday afternoon in the middle of April. A half-eaten salad rested on a monitor as traders hunched over screens with their jackets off. A tourist was attempting to take a selfie with the bronze bull outside at the intersection of Wall and Broad. Additionally, a tanker was still awaiting authorization to move in the murky waters off the coast of Oman, somewhere in the world. In actuality, the Strait of Hormuz had not reopened. The negotiators had returned empty-handed from Pakistan. There was still fighting in Lebanon. Nevertheless, the S&P 500 was on the verge of reaching an all-time high by the closing bell.

It’s the kind of disconnect that causes you to blink twice. The market is behaving as though the peace agreement has already been signed in invisible ink, a war is ongoing, and an oil chokepoint is still partially closed. As many on financial Twitter began to refer to it, the cognitive dissonance is not subtle. From the beginning of the conflict on February 28 to the most recent low on March 30, the S&P 500 dropped by roughly 8% during the first few weeks of the Iran War. However, since then, stocks have recovered, wiping out all losses since the start of the conflict. There were eleven trading sessions. It only required that.

The rebound isn’t really what’s odd. It’s the speed. Watching the tape over the past few weeks gives the impression that markets are no longer even waiting for the news. It is being front-run by them. The stock market is looking ahead, with investors placing bets on a speedy settlement of the dispute. Traders seem to think that none of this will matter six to twelve months from now. The tankers are going to move. Brent is going to return to the 1970s. The money will continue to come in. So why not attend the rally?

In any case, that is the theory. The other piece is a little awkward and more behavioral. The so-called TACO trade, “Trump always chickens out,” has conditioned investors to think that President Donald Trump will back down if the economic suffering gets too severe. Although traders whisper this half-joke into their headsets, the price action clearly reflects it. The dip becomes shallower and the bounce occurs more quickly each time the rhetoric intensifies. In a sense, the market has developed a habit.

The consumer, on the other hand, consistently refuses to act in accordance with the textbook’s recommendations. According to a Bank of America analysis of its customers’ debit and credit card spending, consumer spending kept up a healthy pace last month. The spending categories with the largest monthly increases were electronics, home improvement, and department stores—the kinds of purchases people make when they feel optimistic about tomorrow—aside from gas, whose price increased steadily nationwide last month. Inflation at the wholesale level was low. The earnings season has gotten off to a great start. To put it another way, the economy is doing what it has been doing for years: ignoring any challenge.

The uneasiness persists, though. It feels too tidy to have a nearly 10% drawdown and a quick recovery in just six weeks. In the face of uncertainty, markets sell first and inquire later. However, stock market recoveries appear to be occurring more quickly. A portion of that is structural, such as increased systematic purchasing, passive money, and liquidity that is waiting for a 5% decline to be reinvested. After the COVID-19 pandemic, the regional bank scare, and the tariff drama, some of it is faith—or perhaps muscle memory. Investors continue to learn the same lesson: don’t fight the bounce.

The question that no one can truly answer is whether that lesson still applies this time. The cease-fire between the United States and Iran is precarious. On some crucial issues, such as Iran’s right to enrich uranium and a system for monitoring the Strait of Hormuz, the two sides are at odds. According to Oxford Economics, it could take up to eight months for oil shipments across the strait to return to pre-war levels. Elevated crude eventually finds its way into everything, including grocery stores, airfares, and the cost of a packet of fertilizer in Punjab. A soft landing on a runway that hasn’t been constructed yet is priced for the market.

It’s difficult to ignore how much of this rally is essentially a wager on human nature: that a president will change course, that diplomats will make concessions, or that consumers will continue to spend money even as their gas prices subtly rise. None of those things are irrational. All of them have previously occurred. However, they haven’t always occurred. It’s not quite euphoria, nor is it quite denial, as you watch this happen. It’s somewhere in the middle. Even though the lights are still flickering in the distance, the market has learned to stop recoiling.