Market Volatility Rising Amid Conflict in Iran
Geopolitical risk, tax‑season liquidity pressures, and rising policy uncertainty are testing investor confidence (and muddying the economic outlook) even as market behavior continues to track historical presidential‑cycle patterns.
Uncertainty abundant. The U.S.-Iran conflict has entered its fifth week, which also coincides with the timing of the toughest part of the four-year presidential equity market cycle and the coming April tax liquidity squeeze (when consumers and businesses pull cash out of the private financial system to pay taxes, temporarily tightening financial conditions). This is a lot for investors to chew on, and the most notable development we picked up last week was the growing nervousness among long-only investors, who had largely remained calm during the first four weeks of the conflict.
We also saw the equity market disconnect from Fed expectations last Friday. Until then, the S&P 500 had moved in lockstep with the Fed rate cut/hike expectations (i.e., stock market higher if rate cut odds were rising, and lower if rate hike odds were rising). But that de-coupled on Friday – stocks fell as rate cut odds rose – a sign to us that the S&P 500 is starting to worry more about a recession than an inflation shock.
Not coincidentally, policy uncertainty is inching towards April 2, 2025 levels. Historically, this has been a contrarian indicator, with high levels of policy uncertainty associated with higher levels of equities over the ensuing 3-, 6-, and 12-month timeframes.
Outlook cloudier, but thesis intact. We set out this year with a view that seemed contradictory: shock-and-awe economic policy will lift economic growth, but equities will struggle as the gains from that growth were largely already priced into a market that was up double digits in the second half of 2025. Now, the Iran conflict threatens these economic gains. But, incredibly, the S&P 500 has tracked the historical averages of the presidential cycle quite closely, with the Iran conflict pulling forward the cycle by just 4-6 weeks. Interest rates have followed a similar trajectory. Historically, presidents stimulate the economy ahead of the midterm election – rates price this growth in, and it is usually those higher rates that are associated with the midterm equity market sell-off. Said another way, it is not a coincidence to us that the S&P 500 and 10-year yield look like their historical averages.
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