Violently Sideways
Given the developments in the Middle East over the weekend, it's no surprise risk assets are unnerved to kick off the week. U.S. equity futures were down 1-2% when they opened on Sunday night, but as I type, they have since rallied back to virtually unchanged from their Friday close. European markets were harder hit, down as much as 2.5%, while Emerging Markets and the Asia Pacific complex got stung by about 2%. The biggest moves are emanating from the commodity markets with oil spiking +13% on Sunday night, but has been fading ever since (WTI up 5% as I type to $70.65). The spike in oil stems from a threat to tanker traffic through the Strait of Hormuz, through which about 30% of global seaborne oil exports pass. A sustained spike in oil is one of the most material risks to markets and global growth, so this bears watching.
Interest rates initially traded down, but have since rallied, with the yield on 10-year Treasuries rising to 4.05% after closing at 3.94% on Friday, down 34 basis points since the early February peak and the lowest close since October 2024. Global credit markets, which were already wobbling due to spreading concerns over the AI file, are also weakening, with high-yield spreads up 40 basis points from their tightest level seen in late January. Keep in mind that it is the opening days of any major geopolitical crisis that unleash the maximum level of investor uncertainty.
The U.S. dollar index is seeing a flight-to-safety rally, with it trading up 1% on the day and pushing up against its 100-day moving average for the first time since mid-January. The move in the dollar is another market signal catching my attention as it is now flirting with the downtrend line that has been in place since early 2025. A sustained close above current levels could kick-start a dollar squeeze as most investors are positioned for continued dollar weakness. Such a squeeze would have a domino effect that makes its way into other markets.
Even with the move in the dollar, gold rallied as much as +2.5% to over $5,400/oz, but has since faded most of that spike while Bitcoin has jumped nearly 6% to just over $69,400.
I for sure do not downplay the implications of the bombing in Iran, but strictly looking at it from a markets perspective, it’s important to remember that we did have a more moderate version of this last June with that prior conflict, and the oil price jumped more than +7% that day (from $68 per barrel to $73 per barrel) and the S&P 500 closed that day with more than a -1% falloff; a month later, WTI was back to $68 per barrel and the S&P 500 had rebounded nearly +5%.
Before that event, we had Russia’s invasion of Ukraine in February of 2022, where WTI oil soared +35% (~$90/bbl to ~$125/bbl) with imaginations running wild that Russia had its eyes on all of Eastern Europe, but by summer, oil prices were lower than when the war began. I’m not saying the past is going to be an identical prologue, and while I do like the energy and oil space from an investment perspective, I encourage investors not to get too excited (bullish or bearish) about the move in oil prices.
Without question, the scale of this incursion is far bigger than what transpired last June – regime change is a giant step up from bombing nuclear installations at Fordow. And we definitely should not be discounting the tail risks if this conflict is sustained, or if oil prices spike above $100 per barrel and stay there for a few months. But my sense is that this too shall pass, and my bet is that the world is going to emerge as a much safer place. Look, it’s not difficult to find contempt for President Trump, but you have to admit that the world is a radically changed place for drug traffickers and terrorists. The longer-term prospect of real, durable peace in the region is what patient investors with long horizons should be thinking about. I’m not saying we’re there, but suggesting we’re trending in that direction isn’t a stretch. I like the way Mike Green of Simplify Asset Management put it in his note over the weekend:
I sometimes remind people that the right mental model for Xi and Putin is Tony Soprano — not particularly bright, but devastatingly ruthless. In my early advisory work for the US military, I often emphasized, “We should not become China to defeat China.”
Unfortunately, I think we have made significant strides on both fronts. I’ll take the good (geopolitics), and hopefully, we still have a chance against the crime families.
The US is on the verge of “running the geopolitical table” to use a straight pool term. Control of the Western Hemisphere is within reach, geopolitical chokepoints are increasingly closed to China, strategic sourcing is increasingly solved with TSMC and Mountain Pass now both operational on US soil (do not confuse military strategic sourcing with “no concerns on the consumer/industrial front”). Drones deployed in the Iranian attack are the 21st-century equivalent of the WW2 Liberty ships — not invented here, but cheap as chips to deploy.
What is really surprising is the extent of the internal opposition to the strikes against Iran and how Donald Trump yet again has engaged in an illegal war, bypassing Congress. As if this sort of thing never happened before – rack a history book and/or execute a simple AI query:
Bill Clinton (1993–2001)
President Clinton frequently cited executive authority for operations, particularly those involving NATO or humanitarian justifications.
Operation Uphold Democracy (Haiti, 1994): Deployed 20,000 troops to remove a military regime. Clinton argued he did not need congressional approval, though he received a retroactive "support" resolution.
Operation Desert Fox (Iraq, 1998): A four-day bombing campaign against Iraqi weapons facilities.
Operation Infinite Reach (Sudan and Afghanistan, 1998): Cruise missile strikes against Al-Qaeda sites in response to embassy bombings.
NATO Bombing of Yugoslavia (Kosovo, 1999): A 78-day air campaign. This was a major point of contention, as the House explicitly voted against authorizing the strikes, yet Clinton continued the operation.
George W. Bush (2001–2009)
While the major wars in Afghanistan and Iraq were authorized by Congress (the 2001 and 2002 AUMFs), Bush also used unilateral power for targeted actions.
Somalia Airstrikes (2007): Targeted Al-Qaeda suspects. While some argued these fell under the 2001 AUMF, the administration also relied on Article II authority for the specific tactical decisions
Barack Obama (2009-2017)
Obama famously tested the limits of the War Powers Resolution by arguing certain missions did not constitute "hostilities."
Operation Odyssey Dawn (Libya, 2011): Air and missile strikes to help oust Muammar Gaddafi. When the 60-day War Powers deadline passed, the administration argued that because U.S. troops were not in "sustained fighting" on the ground, congressional approval was unnecessary.
Syria Drone Strikes (2014): Initial strikes against ISIS were launched before a formal debate on whether the 2001 AUMF applied to the group, which did not exist in its current form in 2001.
Donald Trump (First Term, 2017–2021)
Trump utilized executive authority for high-profile "one-off" strikes.
Shayrat Airbase Strike (Syria, 2017): 59 Tomahawk missiles launched in response to chemical weapon use.
Assassination of Qasem Soleimani (Iraq, 2020): A drone strike against the Iranian general. The administration cited Article II powers to "defend U.S. personnel" from imminent threats, leading Congress to pass a War Powers Resolution to curb such actions (which Trump vetoed).
Joe Biden (2021–2025)
Biden largely relied on Article II for retaliatory strikes against non-state actors.
Strikes on Iran-backed Militias (Iraq/Syria, 2021 & 2023): Multiple airstrikes conducted in response to rocket and drone attacks on U.S. bases.
Operation Prosperity Guardian (Yemen/Red Sea, 2024): Strikes against Houthi rebels to protect international shipping lanes. These were conducted without a specific new AUMF, citing the President's authority to protect American interests and regional stability.
I know, I know, Trump campaigned on the promise of no new wars in the Middle East. The problem with election campaigns is that situations change in the aftermath, and the problem with much of today’s Congress, beyond their repeated abdication to compromise, govern, and/or legislate beyond the interest of their own party, is that it seems willing to tolerate terror regimes. Yes, the polls show that some 70% of Americans do not support this war against Iran, but guess what? Almost 90% also opposed going to war against Hitler – until, that is, Pearl Harbor was attacked in December 1941. This is why the U.S. Constitution (Article II, Section 2) formally establishes the President as the Commander-in-Chief of the Army and Navy. I’m anxiously awaiting the day Congress figures out how to lead and represent the people as a collective body – the way the founding fathers envisioned – but until then, we’re left with the executive and judicial branches exercising greater authority.
Back to the markets, where the S&P 500 closed February down -0.76%, which halted a nine-month winning streak. The bigger question is when and in what direction the S&P 500 is going to break out of this 6,800 – 7,000 trading range that has persisted since October. We’re talking about four months of violently choppy sideways trading action, where the fundamental backdrop has been, for the most part, solid.
However, we are starting to see signs that breadth is deteriorating, and the big institutional players are now selling on strength and weakness as “distribution days” accumulate. Equally troubling is seeing the KBW Bank index, which includes the largest U.S. banks such as JPMorgan, Citi, and Bank of America, down by -10% from the recent highs (largely in reaction to escalating concerns in the market for private credit). Even worse, the S&P 500 Consumer Finance subsector has collapsed by -22% and is now trading at a seven-month low.
The tech-heavy Nasdaq Composite looks even worse and is at risk of breaking below its 5-month trading range. Without question, the spending spree in the AI arms race and fears of disruption across the software and other at-risk industries are weighing on the long-term terminal values investors are assigning to these businesses today. It is genuinely difficult to keep up with how rapidly new use cases, products, and plugins are being created. Where it seems as though the progression over the last two months arguably exceeds that of the prior two years. All of which plays itself out in equity markets through extreme dispersion – Tech down big / Energy up big one day, Tech up the next day / energy and financials down the next day – rinse, wash, repeat. It’s as though the rules that defined the last 20–30 years of markets are being rewritten. Some of the best businesses on the planet are being structurally challenged, while some of the worst suddenly look like winners because they own scarce, hard assets or irreplaceable inputs.
All that said, one can acknowledge the potential and transformative abilities of AI while at the same time recognizing the friction in most industries that will inhibit it from eating the world on the hastened timeline the doomsday scenarios ascribe. I continue to keep an open-mind on the path this AI revolution takes, but I’d be remiss if I didn’t admit to thinking the hysteria is reaching a short-term extreme.
One piece of advice I want to end with is this: investors should not be dramatically altering their portfolio because of this latest war between the U.S., Israel, and Iran. Geopolitics, while interesting and important, are a very poor tool drive investment decisions. For instance, had you bet against the stock market when the U.S. bombed Iranian nuclear facilities back in June 2025 (an event that last about two weeks), you would have made a bad decision because the S&P 500 point-to-point rallied +2%. Similarly, if you bet on oil after the initial spike, it would have been a mistake because WTI actually declined from $73 a barrel to $64 (a -12% drop). And even if you go back to Bosnia in 1995, Kosovo in 1999, Afghanistan in 2002, Iraq in 2003, Libya in 2011, and Syria in 2014, you will see that shifting your portfolio around due to geopolitics is a fool’s errand.
Even accounting for the fact that this war with Iran is on a different scale, the shocks can sometimes generate a sharp market reaction initially (usually driven by what the oil price does), but any disruption typically is short-lived. Without question, such events can exacerbate the underlying fundamental condition, but the majority of the time they end up being nothing more than noise and a sideshow to the more important macro drivers moving markets and policy.
The coming week is busy data-wise, with the February manufacturing ISM out this morning (another rate-of-change improvement on the headline print), January retail sales on Friday, and nonfarm payrolls for February (also on Friday). As for Friday's employment report, I’m interested in revisions to prior months rather than the actual NFP headline figure for February, which has become a ruse for talking heads. Last week, we received the updated 2025Q2 private-sector employment data from the Business Employment Dynamics (BED) database. The numbers show a -321k net jobs contraction over that three-month period, the steepest decline since the second quarter of 2020. The unrevised BLS numbers show that +74k jobs were created in Q2 2025 – a number that will eventually get revised lower by -395k. While acknowledging that this data is well in the rearview, it does have me wondering why the Fed wasn’t cutting rates last Fall, given the labor market was so weak. I appreciate the impossibility of forecasting the future with repeated accuracy, but when I hear Fed officials today talk about monetary policy being in a holding pattern as they await further signs of weakness in the labor market before opting to cut rates, and then I see that job growth for all of 2025 was the weakest since 2003 (outside of a recession) – I can’t help but think the market is mispricing the number of cuts we’ll get this year.
If anything, this is proof that this Fed is not in the mindset to act proactively and will likely wait until the data forces its hand. The problem with this philosophy is that if economic growth, the labor market, or credit get disorderly to the downside, the Fed will be too late to prevent the cardiac arrest and therefore be reliant on its ability to revive the patient.
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