US stocks began to recover from their steepest declines on Tuesday, seemingly as traders again wagered that President Donald Trump would find a way to manage the fallout from another crisis he ignited. However, Wall Street strategists are cautioning against relying on the so-called "Trump put" in trading strategies related to the Iran conflict. "It goes back to the classic adage about war, which is once war starts, it has a momentum of its own," said Bob Elliott, Chief Investment Officer at New York investment firm Unlimited. "The ability to influence and respond to the pain that's already in the market is not necessarily as easy as it was on 'Liberation Day,' when Trump was essentially in full control of the policy choices." Attacks by the US and Israel on Iran have destabilized the Middle East and could deliver a fresh inflationary shock to the US economy by driving up oil prices. Furthermore, uncertainty regarding when and how the attacks will conclude heightens the risk of a prolonged conflict with unforeseen consequences beyond the White House's control. In this regard, the Iran conflict differs from Trump's trade wars, his remarks about acquiring Greenland, or his attacks on Federal Reserve independence—all of which unsettled investors domestically and abroad. In each prior instance, traders anticipated Trump would retreat if financial markets fell too sharply, a strategy later dubbed the "TACO trade" ("Trump Always Capitulates On") and fostering a buy-the-dip mentality that fueled stock market rebounds. This instinct may have tempered the initial reaction in US markets, resulting in significantly smaller declines for US stocks and bonds compared to overseas markets. Over the past two days, stocks opened sharply lower but gradually pared losses as trading sessions progressed. On Tuesday, the S&P 500 ultimately closed down 0.9%, after having fallen as much as 2.5% intraday. "As with every sell-off we've had before, after the initial wave lower, buyers stepped in at reasonable support levels, and FOMO-driven traders pushed the bounce even higher," said Steve Sosnick, Chief Strategist at Interactive Brokers. Trump stated on Tuesday that the US would provide insurance guarantees and naval escorts for tankers and other vessels transiting the Strait of Hormuz, aiming to prevent a potential energy crisis triggered by the conflict. But a surge in oil prices risks exacerbating US inflation and casting doubt on whether the Fed will resume interest rate cuts. Stocks have been trending lower in recent weeks, weighed down by factors including the AI narrative, localized issues in credit markets, and slowing employment growth. Regardless of how swiftly the conflict ends, the risk of widespread damage to Middle Eastern oil infrastructure could prolong its impact, according to Baird Investment Strategist Ross Mayfield. The Trump administration has hinted that bombing operations could continue for weeks but has not clarified how the conflict will be resolved. Currently, analysts believe the market reaction is not yet severe enough to provoke significant concern in Washington, as it did in April. Substantial pressure on the White House would likely only materialize if there were a risk of a "market-triggered recession"—defined as a 10%-15% stock market decline, said Matt Gertken, Chief Geopolitical and US Political Strategist at BCA Research. "Things would have to get significantly worse for it to be a real problem for him," said Gina Martin Adams, Chief Market Strategist at HB Wealth Management. "It requires a deeper discussion." John Briggs, Head of US Rates at Natixis, shares this view, stating that only a sharp rise in bond yields that is "disruptive and spills over into credit and equity markets" would prompt Trump to seek an end to the conflict. However, regardless of Trump's actions, stock market performance may largely hinge on the conflict's impact on oil prices. Historical analysis of past Middle East conflicts suggests that stock markets tend to rise during such periods, provided crude oil prices do not increase by 75% or more compared to the previous year, according to the Chief Investment Officer and Chief US Equity Strategist at Morgan Stanley.
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