The Maddening "Ground Hog Day" Markets Pt 1

The markets are stuck in a kind of “Groundhog Day.”

If you’ve never seen the 1993 Bill Murray movie, it concerns a man who keeps living the same day over and over. The financial markets have had a similar feeling over the last few months, although the repetitive cycles are a few weeks long as opposed to every single day.

What I mean by this, is that the same issues keep popping up, resulting in the same market reactions.

The issues in question:

1. The War in Iran.
2. Concerns about the true potential of Artificial Intelligence (AI).

Every few weeks, one of these issues resurfaces and the markets react violently. As a result of this, it feels as if nothing is really happening, though under the surface, some major developments are taking place.

Let’s dive in.

Groundhog Day, Part One: the Iranian Conflict

As I first noted back in March, the War in Iran is an extremely complicated situation that defies easy or rapid solutions. By quick way of review, some of the more salient points to consider…

From a geopolitical perspective:

1. Iran is bordered by seven nations on land (Iraq, Turkey, Azerbaijan, Armenia, Turkmenistan, Afghanistan, and Pakistan) and five nations by water (Bahrain, Kuwait, Oman, Qatar and Saudi Arabia).
2. Iran is 90% Shia, the segment of Islam that has been in perpetual conflict with Sunni Islam since the mid-600s AD. Iran’s neighbor and the other dominant Middle Eastern power, Saudi Arabia, is Sunni.
3. Iran has strong economic ties to China (the latter purchases 90% of Iran’s oil exports) and strong military ties to Russia (Iran supplies drones and missile technology to Russia).
4. Iran borders the Strait of Hormuz, a narrow (~30 mile wide) shipping lane through which 20% of global oil and liquified natural gas is shipped.
5. Iran is extraordinarily wealthy in terms of natural resources, possessing the fourth largest oil reserves in the world, 2^nd largest natural gas reserves in the world, the largest zinc and lead reserves in the world, etc.

In terms of domestic issues:

1. Iran is ethnically diverse. Roughly 50% of the country is Persian, but the other half is comprised of 13 other ethnicities/ tribes.
2. Since 1979, Iran has been controlled by a Osulgarayan, (roughly translated as Principalists): hardline religious leaders. They control the Islamic Revolutionary Guard Corps (IRGC), the judiciary, the Guardian Council, and most state institutions. Many of these leaders have been killed during this conflict, but the Principalists remain in control of the country’s military/ economic resources at the time of this writing.
3. Iran is a young country in terms of demographics:  Roughly 50% of its population of 98 million are under the age of 30. These individuals grew up with the internet and other resources that allowed them to see the world through a more secular/ western perspective. They are frustrated by the current regime/ political structure and in favor of political reform. There have been widespread protests, but at the time of this writing, reformers have yet to seize power.

In simple terms, this was an extremely complicated geopolitical issue BEFORE the U.S. struck Iran. And it’s only gotten more complicated since the conflict began.

Much of Iran’s central leadership has been killed. As a result of this, what was a unified political structure with clear leadership is now fractured with various factions competing for power.

This is a nightmare for anyone attempting to negotiate a peace deal. Some factions in Iran’s current fractured leadership do want peace. Others do not. And the latter are all too happy to threaten closure of the Strait of Hormuz or fire missiles at U.S-assets or allies, thereby thwarting any hopes of peace.

The result of this is that this conflict keeps following a news cycle that starts over every few weeks. The simplest rendering of that news cycle is:

1. Trump proclaims that Iran has been decimated and desperately wants a peace deal.
2. Iran attacks/ threatens an attack on Israel or U.S.-aligned entities.
3. Trump threatens to [insert over the top language] Iran.
4. Allegedly a peace deal is worked on behind the scenes.
5. Trump proclaims the deal is [insert unsatisfactory language].
6. Return to #1.

Because much of today’s market trading is run by algorithms that read press releases/ media reporting and act without “thinking,” this news cycle keeps triggering the same results in the financial system:

1. Stocks dump.
2. Oil jumps.
3. Gold/silver plunge.

It might feel as if this situation is going nowhere, but a quick look at the charts suggests this feeling is misguided.

Stocks are near all-time highs. This tells us that the economic fallout from the War in Iran should be minimal. IF this was going to trigger a global economic depression, stocks should be struggling. Indeed, if anything, the reason stocks are struggling right now has more to do with the fact that Tech as a sector is experiencing some major concerns (more on this shortly). And because the S&P 500 is very tech-centric, that index, which everyone focuses on, is struggling to break out.

Indeed, when we remove Tech’s weighting by looking at an equal-weighted S&P 500 (each company receives 1/500^th of the index’s weight instead of a weight based on the company’s size), we see a clear uptrend is in place with the occasional dip. This tells us that economic fallout from the conflict in the Middle East is relatively minor (again the S&P 500 is struggling because of issues pertaining to Tech, NOT the situation in Iran).

Which brings us to gold.

One of the truly bizarre facets of the Iranian conflict has been that gold has sold off anytime the conflict appears to be escalating. Historically gold has rallied during periods of greater geopolitical uncertainty.

Gold’s reaction to Russia invading Ukraine:

Gold’s reaction to 9/11.

So why has gold sold off during the conflict in Iran?

Two reasons:

1. Gold has experienced a MASSIVE run up prior to the conflict and was due for a correction.
2. High net worth individuals in the Middle East have been dumping their gold holdings and moving into crypto to move their capital out of the Middle East as quickly as possible.

Regarding #1: prior to the U.S. striking Iran, gold had spent the prior two years more than doubling from $1,750 per ounce to a peak of $5,600 per ounce. To give you an idea of how strong the rally was, gold rose in 19 of the 24 months from January 2024 to January 2026.

After a run like that, gold HAD to correct. And given how frenzied the rally became towards the end (people were literally lining up to buy gold around the world), the subsequent correction was going to be sharp.

Which brings us to #2:  gold has been falling during the Iranian conflict because high net worth individuals in the Middle East have been dumping their gold holdings and moving into crypto to move their capital out of the Middle East as quickly as possible.

If you are a senior Iranian official sitting on a significant amount of wealth, much of which is hidden in gold bars, and the U.S./ Israel begin attacking your nation, you will need to move your money out of the country quickly. Sanctions/ capital controls will make this difficult via traditional banking, which leaves crypto as your best option.

You can see this dynamic clearly in the below chart. Note that when the conflict in Iran first began in late February, gold initially spiked (the usual geopolitical reaction) before PLUNGING rapidly. Bitcoin held up and in fact jumped several times during the month of March despite traditionally being a “risk asset” that falls when the financial system moves into “risk off” mode as it did throughout the month of March. This was due to large pools of capital in the Middle East frantically dumping gold and moving into Bitcoin.

As I mentioned earlier, much of the day-to-day trading in the markets today is run by algorithms. As soon as these algorithms noted that gold dived and bitcoin rallied during the first few rounds of the conflict in Iran, they adopted this correlation to their models. Since that time, gold has sold off anytime news headlines hit the wires concerning issues in Iran.

Ok, we’ve covered a lot of ground already, so let’s run a quick review before proceeding.

1. The situation in Iran is an extremely complicated one and has become more complicated over the last few months.
   1. Iran’s leadership is now fractured. As a result of this, negotiations between the U.S. and Iran continue along a bumpy road.
   2. This “bumpiness” is resulting in a repetitive news cycle in which President Trump keeps repeating the same tropes (Iran wants a deal, the deal is unacceptable, etc.)
   3. Because much of the day-to-day trading in the markets is run by algorithms that trade based on correlations, this repetitive news cycle is resulting in repetitive price movements by various asset classes (stocks, oil, gold).
   4. Despite all the above items, detailed analysis of stocks (comparing equal-weighted S&P 500 to regular S&P 500, comparing oil’s price action to that related to other geopolitical crises, etc.) suggest that the actual economic fall-out from the conflict in Iran will be minimal.

2. Very few people in the world are privy to what is actually taking place “behind the scenes” regarding negotiations between the U.S. and Iran.
   1. These people are NOT talking to the media.
   2. These people are NOT the ones you see on social media/ podcasts/ blog posts speaking with great certainty about what is happening and how this will play out.

I’ll address the second repetitive issue (concerns about the true potential for AI) that keeps surfacing in our financial “Groundhog Day” series tomorrow. In the meantime, to join 30,000 investors in receiving our daily market commentary every morning before the market’s open…

CLICK HERE NOW!

Graham Summers, MBA

Chief Market Strategist

Phoenix Capital Research