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Investors really want to believe in fairy tales. Day after day, week after week, as the war in Iran escalates, they display admirable optimism as a group, latching onto every hint or suggestion, no matter how faint, that US President Donald Trump will back off, it’s going to be OK and we’ll all live happily ever after.
This is understandable to some extent. After all, 2026 was on track to be a very good year for risky assets – more than decent, in fact. The AI trade had its challenges, but enthusiasm was still largely in play, with interest rates pointing lower, and US fiscal policy expected to tickle the market’s bellies. All the stars were aligned for a top year before this war broke out, and investors are eager to get back to normalcy, just as they did after the global tariffs a year ago. More than anything, they want to buy the dip.
Pick any trading day since the war began and you can see evidence of this dynamic. But the past week has been particularly difficult. On Wednesday, US stocks jumped nearly 3 percent to record their best day in almost a year, and oil prices fell below $100 a barrel, after the US President announced ending the war “very soon”.
However, just hours later, it proved to be another useless blow when in a White House address, Trump again escalated his rhetoric against Iran, claiming he would “bring them back to the Stone Age, where they belong”.
So here we go again. Oil rose again, stocks fell again, and we’re back on the treadmill, with confidence in the president’s words rapidly eroding. It’s beginning to feel as if the entire global stock market is an elaborate pump-and-dump scheme.
A curiosity here is that, despite the obvious fact that Trump is not in complete control of the war, and Iran is actually in control of a significant portion of the global energy market, investors continue to be lured into the president’s more warm and fuzzy statements. Analysts and investors say “headline fatigue” has set in, they are desperately trying to tune out the noise, and their confidence in their ability to drive market change has diminished. I’m often told that the constant volatility of the past few weeks has crushed the President’s previously reliable magical ability to pull the stock markets out of trouble.
But the numbers don’t lie. Markets actually still react to presidential announcements. It’s hard to see a way out of this hamster wheel. So far, the market movement has actually been quite modest, again on the assumption that the US will back off given the risk of inflation rising again in the November midterm elections. Shares have taken a hit so far compared to the period since Trump’s global tariff announcement in 2025.
“Are financial markets sleepwalking?” BNP Paribas chief economist Isabel Mateos y Lago asked in a note this week. In general, the modest movements in asset markets so far in this crisis reflect the belief that global economic growth will continue. “But worse outcomes are also very likely,” he said. “Don’t see them at a higher price… it could be a problem if it suddenly changes.”
There is still a narrow and winding path out of this crisis. But now is the time to start taking more seriously the potentially far more adverse consequences for the global economy and the money we have all stashed in the markets.
Wei Yao, an analyst at Société Générale, wrote, “The war is now best regarded as a chokepoint crisis with systemic risks, and it has moved into an area in which escalation is non-linear and difficult to control.” Theoretically, this in itself should be enough to prevent the US (and certainly Israel) from continuing to escalate tensions. But we have gone too far in assuming that everyone will act in their own rational self-interest.
This puts professional investors at risk, especially when the usual safe havens like gold and the dollar are not working as usual. “You’re up, you’re down, there’s no trend of volatility, so it forces investors to invest smaller,” said Greg Peters, co-chief investment officer of fixed income at PGIM. “It’s really hard. You think you have a competitive advantage, but there’s no such thing.”
The bond markets, in which Peters is an expert, and which form the basis of the financial system, are already showing signs of stress. Trading is becoming harder, and bonds with shorter maturities, which are more sensitive to what central banks do next, are on something of a wild ride as investors brace for the possibility of previously unexpected interest rate rises.
It seems like market movements have gone into overdrive, and it’s all become too much. “I think it is,” Peters said. “But I wouldn’t bet my career on it… next week it could be the opposite.”
This is really all that investors can do. Tread lightly, assume nothing, and don’t get carried away with the idea that a brave prince will save the day. This is a time to reckon with a long period of radical uncertainty.
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