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America’s Greatest Bull Market Powers Through the Mideast Storm

Sam Potter and Justina Lee
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America’s Greatest Bull Market Powers Through the Mideast Storm

(Bloomberg) -- It’s been 10 days since Iranian protesters stormed the American embassy in Baghdad. One week since the strike that killed a top general for the Islamic Republic. About 72 hours since U.S. bases in Iraq came under fire.

Yet in markets, geopolitical flare-ups already look like old news.

The S&P 500 slipped 0.3% Friday, to end a tumultuous week in Mideast relations just short of an all-time high. Ditto the Nasdaq 100, and the Dow Jones Industrial Average, which peaked above 29,000 for the first time. Even jobs data that slightly missed estimates failed to sour sentiment much. Equity implied volatility held comfortably below its one-year average, while calm returned to Treasuries after the fastest reversal in 10-year yields since November 2016.

For a week that saw “World War III” trend on Twitter, the recovery in risk appetite served as a visceral reminder of the staying power of this record bull market. Buoyed by optimism on trade, growth and liquidity, havens and developing-economy assets tell a similar story. After a brief market upheaval, it’s almost like the U.S.-Iran spat never happened.

“There is burgeoning evidence that the manufacturing and trade-oriented part of the world economy is groggily finding is feet,” said William Hobbs, chief investment officer at Barclays Investment Solutions in London. “This may be constraining the degree to which investors feel they can respond to regional tensions by dumping risk assets.”

After Iran’s promised retaliation proved limited enough to avoid further escalation, both nations stepped back from the brink. Tensions continue to simmer with Iran accusing Western governments of engaging in “psychological warfare” for claiming a Boeing Co. jet that crashed near Tehran Wednesday was hit by a missile.

Yet the traditional pillars of the bull market stand taller than ever. Among tech shares, semiconductor firms are making a comeback on optimism the phase-one trade deal between the U.S. and China -- due to be signed next week -- will re-ignite demand.

The Philadelphia Semiconductor Index hovered near the highest versus the S&P 500 in almost two decades after hitting its strongest level since 2000 last week.

“From a macro perspective central bank liquidity has been helpful,” said Marcus Morris-Eyton, a portfolio manager at Allianz Global Investors. “From a stock perspective, much of the recent strength has come from the tech sector.”

Even more eye-catching than the stock action this week: the move in oil. West Texas crude posted its worst week since July, ending lower than before President Donald Trump ordered the strike on Qassem Soleimani.

To Hobbs at Barclays Investment, these kind of market reversals underscore the folly of second-guessing Middle East mayhem.

“We do not see an edge for ourselves guessing where tensions are likely to head next when the main protagonists themselves are unsure of the next steps,” he said.

Hobbs remains overweight equity and underweight duration as the global expansion ticks up. The World Bank projected this week that world growth will accelerate to 2.5% this year from 2.4% in 2019.

Still, a lot of good news now looks priced-in while valuations based on projected earnings are at an 18-year high. With companies set to report fourth-quarter results next week, market resilience faces another new-year test.

“This week is a relatively short time frame, but I am to some extent surprised by the strength of equities in recent months, which appears to have outpaced economic newsflow,” Allianz’s Morris-Eyton said.

--With assistance from Yakob Peterseil.

To contact the reporters on this story: Sam Potter in London at spotter33@bloomberg.net;Justina Lee in London at jlee1489@bloomberg.net

To contact the editors responsible for this story: Sam Potter at spotter33@bloomberg.net, Sid Verma, Jeremy Herron

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