(Bloomberg) — Five weeks into a Middle East war that’s sending shockwaves through the global economy, the US stock market has settled into a predictable pattern. It starts the week on a strong note, drifts sideways toward the middle of the week and then, like clockwork every Thursday and Friday, collapses.
A similar dynamic, to one degree or another, has been playing out in European and emerging-market stocks and even some US Treasury bonds. It’s been particularly stark, though, in the S&P 500 Index. Since the Iran war began, it’s posted cumulative gains over the first three days of the week but cratered 9%, all told, on Thursdays and Fridays.
The rationale, experts say, is simple. The weekend represents a two-day period — or three-day period this holiday weekend — when investors can’t trade. And a lot can happen in the war in two days that would further throttle the global economy, especially given President Donald Trump’s affinity for launching major gambits when markets are closed. So many investors prefer to trim their stock holdings late in the week.
“Going into a trading blackout with unknowable risks” is an unsettling thought, says Joe Gilbert, portfolio manager at Integrity Asset Management. “It has become easier to de-risk going into weekends than to hold positions.”
The bullish sentiment at the start of this week was especially acute, with the S&P 500 climbing over 3% on optimism that Trump was eager to extricate the US from the conflict he unleashed.
But on Wednesday night, that optimism quickly dissipated when Trump pledged in a televised address to continue a bombardment of Iran over the next few weeks that would “bring them back to the stone ages where they belong.” S&P futures sank 1% as oil prices surged, indicating that, once again, stocks are poised to fall come Thursday.
Optimism, says Steve Sosnick, chief strategist at Interactive Brokers, is typically replaced by risk aversion “as the week goes on.”
Trump’s address to the nation fit the pattern he’s followed since the US and Israel began the bombing campaign, oscillating between claims of imminent victory and threats to significantly escalate his attacks on Iran.
Earlier in the day, he had used similar language, saying he’d continue “blasting Iran into oblivion” until the Strait of Hormuz, a key transit point for Middle East oil exports, is re-opened. Iranian officials dismissed the threat, saying they won’t be cowed by Trump’s “absurd displays.”
With oil prices still elevated, and no imminent signs of a ceasefire, Sosnick is skeptical this week’s gains are any more sustainable than those seen at the start of other weeks. “I think the downtrend continues,” he said, “until there is a verifiable return to something resembling normalcy.”