Traders work on the floor at the New York Stock Exchange in New York, Tuesday.Seth Wenig/The Associated Press
On the same day the U.S. President threatened to erase a country of 90 million people, the S&P 500 Index of U.S. stocks went up. That says less about the state of the world than it does about the mental gymnastics it takes to be an investor in the age of permacrisis.
You could call it complacency, or a learned numbness to constant chaos. Perhaps a perverse side effect of late-stage capitalism. But it’s not irrational. The stock market has been conditioned to look through each new shock before it has really begun.
When the missiles started flying in the Middle East, the stock market never even bothered to go into crisis mode. Now, with a shaky ceasefire in place, equities are on the verge of ringing in new record highs, despite the lasting economic damage the conflict has already wrought.
The past six years have taught investors that caution is not rewarded. Buy every dip. Go long and hold on for dear life.
Opinion: Trump has broken something, and the prewar economy may never return
Look at the madness of the 2020s so far. Not even two-thirds of the way through the decade and already there have already been four major economic shocks – the COVID-19 pandemic, Russia’s invasion of Ukraine, the tariff wars and now the war in Iran.
Each one had its own potential for financial doom. The four together might have been cause to liquidate one’s portfolio and invest instead in a well-stocked bunker.
Pity those investors who did so and sat on the sidelines of this bull market. Since the end of 2019, the S&P/TSX Composite Index has practically doubled. The Nasdaq 100 Index of American tech stocks has nearly tripled. That’s a run for the history books when you consider what the stock market was up against.
Many investors have been so spoiled by double-digit returns they have forgotten how to panic. So quick are they to anticipate the rebound, they forestall the sell-off from ever really taking hold.
But a stock market that ignores risk is a risk all its own.
It’s absurd to think the mess in the Middle East is over. The fragility of the peace deal aside, there are already economic ripple effects that can’t simply be reversed. Even in a best-case scenario, oil prices are unlikely to fall back to prewar levels.
That means higher gasoline prices, higher inflation and higher interest rates than everyone was modelling back in February. Damaged energy infrastructure in the Persian Gulf will take years to repair. Fertilizer shortages will filter through to higher grocery bills. Household finances will get tighter.
The economy does not escape a 100-per-cent increase in oil prices unscathed. The extent of the fallout depends on how long prices stay there. So far, U.S. crude has stuck around the US$100-a-barrel mark.
The S&P 500, on the other hand, is a couple of decent days away from setting a record high. The S&P/TSX Composite is about 2 per cent off prewar levels.
There are theories about why markets have become so calm. Structural forces may have effectively quieted down volatility, such as the trillions of dollars flowing into passive investment funds every year. These vehicles plow money into stock market indexes regardless of financial conditions, helping maintain investor demand even when disaster strikes.
The willingness of policymakers to backstop the financial markets in a crisis is a factor as well.
It adds up to a growing faith in the ability of the stock market to survive whatever is thrown at it. The recent track record, after all, is hard to dispute.
A once-in-a-century plague, the end of the post-Cold War security order, a rupture of the world trade framework and now the worst global energy threat in history, all contained within an upward trajectory of relentless stock market gains.
Each recovery had its own flavour. The lightning-fast pandemic rebound was predicated on astronomical amounts of financial support for households and businesses. The bear market in 2022 ended when runaway inflation was vanquished without a major recession. Last year’s sell-off fizzled when U.S. President Donald Trump backed off a tariff onslaught that threatened to tank the global economy.
And now investors seem eager to move on from the latest flare-up without so much as a correction.
What does the stock market know that we don’t?
Nathan Tankus, the prominent U.S. financial writer and former University of Ottawa researcher, says there are limits to the predictive power of the stock market.
“Nor do financial markets have some divine and indescribable magic,” he wrote in an online article last year. Instead, we should think of the market as a “conventional wisdom processor” that reflects the shared views of a core of market participants – a kind of herd mentality, or groupthink.
And right now, conventional wisdom is brimming with faith in the stock market’s ability to endure anything. History shows excessive belief eventually becomes the threat, when the market behaves as though everything is great until it becomes obvious that it is not.