Amid the Middle East conflict entering its fifth week and the global economy facing continued shocks, US stock markets have developed a predictable pattern: a strong rally at the start of the week, followed by narrow fluctuations mid-week, and then, like clockwork, a significant plunge on Thursdays and Fridays. Similar trends have emerged to varying degrees in European and emerging market equities, and even in some US Treasury bonds. However, this pattern is particularly pronounced in the S&P 500 index. Since the outbreak of the Iran conflict, the index has recorded cumulative gains over the first three trading days of each week, but has fallen a total of 9% on Thursdays and Fridays combined.
Experts state the underlying logic is not complex. The weekend presents a two-day (or three-day, including holidays) trading halt, during which numerous events could further impact the global economy, especially considering the US President's tendency to initiate major actions during market closures. Consequently, many investors prefer to reduce their stock holdings as the weekend approaches. Joe Gilbert, a portfolio manager at Integrity Asset Management, remarked that entering a trading blackout period with "unknowable risks" is an unsettling prospect. "It has become easier to de-risk ahead of the weekend than to hold positions," he said.
Bullish sentiment was especially strong at the start of this week, driven by optimistic expectations that the President was eager to extricate himself from the conflict he initiated, pushing the S&P 500 up over 3% at one point. However, during a televised address on Wednesday evening, the President pledged to continue bombing Iran in the coming weeks to "bomb them back to the Stone Age," swiftly dousing market optimism. S&P 500 futures fell 1%, and oil prices surged, signaling renewed pressure on US stocks for Thursday.
Steve Sosnick, Chief Strategist at Interactive Brokers, noted that optimism often gives way to risk aversion as the "trading week progresses." The President's national address continued a pattern seen since the US-led bombing began: oscillating between claims of imminent victory and threats of significantly escalating strikes against Iran. Earlier that day, he used similar rhetoric, stating he would continue "bombing Iran back into oblivion" until the key Middle East oil export route, the Strait of Hormuz, reopens. Iranian officials dismissed these threats, stating they would not be intimidated by what they called a "ridiculous performance."
Sosnick believes that with oil prices remaining high and no immediate signs of a ceasefire, the sustainability of this week's early gains is no greater than in previous weeks. "I think the downward trend will persist," he stated, "until there is clear evidence of some return to normalcy."
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