After a two-day slump to start the week, stocks were on the rebound on Wednesday after President Trump extended the ceasefire with Iran on Tuesday night.
As of 2:32 p.m. ET on Wednesday, the S&P 500 (^GSPC +1.18%) was up 0.8%, while the Nasdaq Composite had gained 1.3%. Given the news about the ceasefire, those gains weren't surprising as Wall Street has reacted favorably to any progress toward peace since the war began. What was unusual was that oil prices were also moving higher, with Brent crude, the global benchmark, rising 3% to $101 a barrel in response to continued tensions in the Strait of Hormuz, as the U.S. maintained its blockade of the passageway and Iran attacked three ships in the Strait.
Since the war started, oil prices and stock prices have only risen in tandem on a handful of days. Typically, during the war, the two asset classes move inversely to one another, as cooling tensions tend to both lower oil prices and lift stock prices, while an intensification of the conflict does the opposite.
The shift in today's price action could have a number of implications for investors.
Image source: Getty Images.
What rising oil prices and stock prices mean
First, investors should understand that oil prices and stocks are responding to two different pieces of news. Stocks are up because of the ceasefire, a sign that the conflict is more likely to be settled soon, while oil prices are gaining on continued tensions in the Strait of Hormuz.
In other words, the fate of the Strait of Hormuz seems to be separating from the war itself, even as they are inextricably connected. At this point, stock investors seemed to have priced in elevated oil prices, while progress toward peace is still seen as favorable.
One sign of this thinking is that the iShares MSCI South Korea ETF (EWY +0.11%), which is sensitive to the situation in the Strait of Hormuz as most of the oil South Korea imports comes through that channel, was up 6% in late afternoon trading, though that was also due to the strong performance of the tech sector.
NYSEMKT: EWY
Key Data Points
Tech is supreme again
Tech stocks have also been rising recently, regardless of the news out of the Middle East, as investors seemed to have shifted their attention back to the AI boom.
The State Street Technology ETF (XLK +2.37%) was on track for its 16th straight gain today, and semiconductor stocks soared on Wednesday as subsectors like power and CPU chips are the latest category to respond to the AI boom.
The Iran situation is still fluid
Investor sentiment has improved dramatically in the last few weeks, but the war is still unresolved, meaning investors should be prepared for tensions to flare again.
Still, the volatility of the last two months is a reminder that holding through the turbulence is still the best strategy for investors. While there could be another sell-off triggered by the conflict in the Middle East, investors should be confident that the stock market can overcome it, especially given the recent strength in the AI sector.
