Investors are wondering if stocks have seen the worst of the Iran war

Heightened levels of geopolitical uncertainty are nothing new for Wall Street, with the only difference being a shift in the epicenter. Photo by ANGELA WEISS/AFP via Getty Images

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Of course, concerns remain. Surging oil prices driven by the shutdown of the Strait of Hormuz threaten to spur inflation, reducing the odds of an interest-rate cut from the U.S. Federal Reserve and raising the chances of an economic slowdown or a recession. Supply chains for various products, from metals and materials to food and pharmaceuticals, are at risk. And then there are the worries about artificial intelligence disruption and private credit exposure that were weighing on sentiment before the war began.

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But even as the hostilities show little sign of letting up, investing pros are seemingly learning to roll with the geopolitical uncertainty. The S&P 500 index is up 1.3 per cent this week, its best two-day performance since the U.S. and Israel began their bombing campaign, and is down just 3.8 per cent from its all-time high in January. Meanwhile, options traders have been unwinding some of their bearish bets. And a recent decline in investors’ equity exposure may be a sign that the market is finding a floor.

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“The question is: Why have they not been spooked by it?” said Sam Stovall, chief investment strategist at CFRA, adding that the losses are below the threshold for a pullback. “I think, in many ways, investors are encouraged by the resilience of the market and (it) likely points to a continued improvement in earnings growth estimates as the reason for the underlying support.”

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The cost of using options to protect against a five per cent decline in the State Street SPDR S&P 500 ETF, better known by its ticker SPY, relative to a similar rally has been subsiding after hitting the highest level in more than a year earlier this month.

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A relative sense of calm is apparent in the Cboe Volatility index, or VIX, which traded as high as 35 on March 9, a sign of rising market distress, but has since retreated, closing Tuesday at around 22. Subdued demand for options betting on a jump in the VIX coupled with outflows from long VIX exchange-traded products, point to a lack of panic by investors, according to derivatives strategists at Barclays.

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Declines in the S&P 500 have been “comparatively modest” despite the volatility, said Noah Weisberger, chief strategist at BCA Research. Steeper losses are still possible, but the amount of time it has taken to get to just a five per cent pullback could be a good sign. Futures on the S&P 500 index were up 0.5 per cent at 7:13 a.m. in New York on Wednesday.

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Should the index suffer a five per cent drop from its recent high by the end of the week it will have taken more than 47 days. Since the Second World War, the S&P 500 has never fallen into a bear market when it has taken more than 40 days to decline five per cent, CFRA data show.

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Time may also be be playing a role in the improving market sentiment.