Wall Street Strategists Warn Not to Bet on Trump Rescuing Stocks Rattled by Iran War

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(Bloomberg) — As US stocks began paring back their deepest losses on Tuesday, it looked as if traders were again starting to bet that President Donald Trump would find a way to contain the fallout from another crisis he unleashed. 

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But Wall Street strategists are warning against relying on a so-called Trump put when it comes to the Iran war.

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“It goes back to the classic phrase about war, which is it has a momentum of its own once it starts,” said Bob Elliott, chief investment officer at New York-based investment firm Unlimited. “The ability to influence and respond to pain that exists in the markets isn’t necessarily as easy as it was during Liberation Day, where basically President Trump had full control over what the policy choices were.”

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The US-Israeli attack on Iran has destabilized the Middle East and threatens to deliver a new inflationary shock to the US economy by pushing up oil prices. There’s also no clear sense of when or how it will end, raising the prospect of prolonged conflict and unforeseen consequences beyond the White House’s control. 

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That makes the Iran war different than Trump’s trade war, his talk of invading Greenland or his assault on the Federal Reserve’s independence, all of which unnerved investors in the US and abroad. In each case, traders came to expect that Trump would backtrack if financial markets fell too far, a strategy that came to be known as the TACO trade, which stands for Trump Always Chickens Out — and created a buy-the-dip mentality that allowed stocks to rally back. 

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That instinct may have softened the initial reaction in the US, where stocks and bonds have tumbled far less than they have overseas. During the past two days, stocks opened sharply lower but clawed back the losses as the trading day wore on. On Tuesday, the S&P 500 ended down 0.9%, after dropping as much as 2.5% earlier. Futures contracts on the benchmark slipped as much as 0.8% on Wednesday before trimming losses to 0.2% at 3:02 a.m. in New York.

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“As with every other time we sold off, after the first dip buyers stepped in at a logical support point, FOMO-driven traders pushed the nascent bounce higher,” said Steve Sosnick, chief strategist at Interactive Brokers.

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Trump on Tuesday said the US would provide insurance guarantees and naval escorts for oil tankers and other vessels through the Strait of Hormuz, aiming to head off a potential energy crisis caused by the conflict. 

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But the sharp jump in oil is threatening to exacerbate US inflation and has cast doubt on whether the Fed will resume cutting interest rates. In recent weeks, stocks were already being dragged down by fears about the impacts of artificial intelligence, pockets of distress in credit markets and slowing job growth. 

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Baird investment strategist Ross Mayfield said the risk of extensive damage to oil infrastructure in the Middle East could prolong the impacts of the war, regardless of how quickly it ends.

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The Trump administration has indicated that the bombing campaign may last for weeks, but hasn’t given a clear explanation of what would end the conflict. For the moment, analysts say that the market reaction hasn’t been deep enough to sow significant worry in Washington, as it did in April, when a broad meltdown drove Trump to temporarily halt his tariffs.