Market Lab Report - Global liquidity and the wall of worry

by Dr. Chris Kacher

US-Iran-Israel conflict & the wall of worry

The Israel-Iran conflict which spread to US involvement introduced an unanticipated variable in the Fed and the White House’s inflation predictions. Before the conflict escalated, international oil prices had collapsed nearly 20% in five months. The conflict then pushed crude oil higher spurring inflation fears. Fed researchers estimated that each $10 per barrel increase in oil raises US inflation by about 0.2%. It also drags on economic growth by 0.1%.

Major analysts were seeing sharp pullbacks in stocks. One said, “If Iran closes the Strait of Hormuz or launches a meaningful retaliatory strike, as has been reported by the media as possible outcomes, we expect that a 2% to 3% volatility range is possible in the near term for the S&P 500." Morgan Stanley said continued tension and uncertainty with Iran could leave prices near $80, and a fundamental disruption to the oil supply, like closing the Strait of Hormuz, could push oil “a lot higher from here”.

But markets tell all. Commodity traders did not see this as likely as reflected in the price of oil. That helps explain why the stock market did not reacted negatively. Around 12:35 pm EST, stocks and Bitcoin rallied. It eventually was revealed that Iran feels it considers the skirmish with the US a victory despite the facts, thus saving face. Markets rallied seeing a diffusion of the matter. “If oil traders aren’t too concerned about events involving Iran, it is difficult for their equity counterparts to maintain a major case of nerves,” said Interactive Brokers.

This is typical of the wall of worry markets climb. The two indicators worth paying attention to were oil prices and the VIX, also known as Wall Street’s fear gauge.


If oil were to stay below recent highs while the volatility index climbed to 27.3 which is one standard deviation above its long-run average, that would historically signal an “investable” low for stocks.


Prior reports of ours have said such crises situations usually represent buying opportunities in stocks and in Bitcoin especially given how global liquidity continues to trend higher after a brief pause.




Who knew the US-Iran-Israeli conflict, Trump's aggressive tariffs, a hawkish Federal Reserve, and the underperformance by the Magnificent Seven would push the stock market back toward record highs? As our past reports have been saying, global liquidity that's who.

The rebound has been so sharp that investors who sold during President Trump’s shocking initial tariffs revision on April 9 have missed out in a big way.



Driving the rebound have been a series of tariff negotiations and de-escalations, as well as peace talks between Israel and Iran brokered by Trump. A weakening US dollar has also helped. A depreciating dollar will persist in the second half of the year as US growth moderates and the Fed eventually cuts rates. We also have a strong earnings outlook driven by a rise in AI spending. Even veteran economist David Rosenberg, who typically leans bearish, said the technical set up has also improved in recent weeks, supporting a “spring-summer rally.”

“While this cannot exactly be described as a rally based on the fundamentals,” Rosenberg said, “the technical picture has improved considerably as the gaps get filled with ease and the cumulative daily advance-decline lines for both the NYSE all-issue composite and the S&P 500 make fresh all-time highs.”

Nevertheless, valuations remain stretched near levels seen at the peak of the dot-com bubble, based on forward-earnings estimates but history shows that overvalued leading names often become even more overvalued, especially during bull markets. Further, AI’s exponential growth is doubling every 3 1/2 months in processing power so continues to be underestimated despite the hype, plus AI is rendering debt-based business models obsolete. AI-driven companies like OpenAI and Anthropic achieved massive valuations without borrowing, a shift from historical norms where debt fueled scalability such as in shipping and railroads. Finally, historical data shows that buying stocks at all-time highs can generate slightly better returns versus buying at any other time.