A conflict in the Middle East, now in its fifth week and impacting the global economy, has prompted U.S. stock markets to adopt a predictable rhythm: a strong opening at the start of the week, a sideways trend through the middle, followed by declines that almost invariably arrive on Thursday and Friday.
This pattern has manifested to varying degrees in European equities, emerging markets, and even some U.S. Treasury bonds, but it is most pronounced in the S&P 500 index. Since the onset of the conflict involving Iran, the index has recorded cumulative gains over the first three trading days of each week, only to surrender those advances with a collective drop of approximately 9% on Thursdays and Fridays.
The optimistic sentiment at this week's opening was particularly strong, with the S&P 500 rising over 3%, driven by market perceptions that U.S. leadership intends to de-escalate involvement in the Iranian conflict.
Analysts explain the logic behind this pattern is straightforward: the weekend represents a two-day period—or three days this week with a market holiday—during which trading is impossible. This window carries the risk of significant developments in the conflict, especially given the tendency of the U.S. administration to make major announcements when markets are closed. Such developments could further jolt the global economy. Consequently, many investors opt to reduce their equity exposure before the weekend.
Joe Gilbert, a portfolio manager at Integrity Asset Management, stated, "Entering a trading blackout period facing unpredictable risks is unsettling. Reducing risk before the weekend has simply become the easier choice compared to holding positions."
However, this intra-week trading pattern, forged during a time of war, also serves as a cautionary signal for investors who believe the selling pressure has abated.
Following the rebound early this week, some optimists argue that a market bottom has been established. Noted bull Tom Lee suggested that U.S. stocks often find a bottom early in conflicts and that the current adjustment is nearly complete. He pointed out that the S&P 500 typically bottoms within the first 10% of a conflict's duration; that inflation-adjusted oil prices remain below their average for this century, limiting the economic impact on the U.S.; and that, combined with currently extremely cautious market positioning, the adjustment is 90% to 95% complete.
Steve Sosnick, Chief Strategist at Interactive Brokers, noted that as the week progresses, initial optimism is usually overtaken by a shift towards risk aversion.
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