“You would think that the market should be reacting more given the situation. And to date it really hasn’t.”
This wasn’t some derivatives trader blasting Wall Street from his mom’s basement. This was David Solomon of Goldman — the CEO of one of the biggest names in investment banking — sounding the market’s complacency alarm.
It took a full-blown crisis in the Middle East with multiple rogue regimes — plus missiles flying into the night — for investors to sit up and take notice. Even then, the reaction has been “benign” thus far.
Sure, it sounds odd for a bank CEO to want more investors to panic, but he’s seen this before. What shocks Solomon is that people aren’t freaking out yet.
Initial market reactions to the strikes on Iran saw oil prices double (more than $60 per barrel in one week) and major global indices dip lower. The fighting will get worse before it gets better.
But instead of dumping everything, U.S. investors are attempting to hold onto an “appointment calendar” that seems hell bent on screaming bullish until further notice.
Why does the head of Wall Street’s biggest firm care? He believes that while markets can weather these types of events for extended periods, there is a “cumulative effect” to crises like these. In other words, it could take weeks before the investing public fully digests the ramifications of a war that just might last for months.
Investors Have Spotted the Boogeyman
Stocks aren’t the only thing smashing into a wall. Bonds are selling off too. Even gold, the traditional safe-haven asset king, is plunging alongside every other asset class.
Balanced portfolios are about as balanced as a Gamestop shareholder’s bank account. Until this “risk-off” rotation ends, investors are embracing just one theme. . . pay more and more dollars for fewer and fewer barrels of oil.
Global money market funds have seen the largest weekly inflows in more than a year. Investors are stomping on the risk-off pedal at record levels. The VIX “fear gauge” popped to 20 on Friday, the highest level since November 2023.
It’s Not All Doom & Gloom On The Macro Front
Heading into this crisis, the Fed had a nice package of goods. On one hand we had:
* Rate cuts.
* Further regulatory easing.
* A US economy that still appears to be in “solid shape.”
* Fiscal stimulus and tons of capital being thrown at AI.
But if inflation remains above forecasts just by a few ticks, the window for mega rate cuts closes. And when banks compete with each other to lend out their money, standards typically get loosened. Suddenly we have a “late-cycle” credit problem that no one knows about until lending activity slows.
The popular theory is stocks are praying for peace, but until this weekend they were trading like the war will be short.
The reality? That theory doesn’t last once energy prices start to look less temporary and more like a long-term inflation problem that forces the Fed’s hand. For now, markets are waiting for the other geopolitical shoe to drop.
The only problem? They haven’t realized it already did. But the shoe is always dropping. And markets have always recovered. No risk, no reward.