The Shrug Trade

July 1, 2025

The complexity of our world exceeds our ability to understand it, and markets are no exception.

On June 21, the US carries out “Operation Midnight Hammer”, bombing three Iranian nuclear sites. Five days later, the S&P 500 hits an all time high. The threat for a major geopolitical conflict sparks, at a time when Americans are already expressing high levels of uncertainty, and markets….rally? What is going on here?

Seemingly incongruous market movements like this are surprising, and yet, not all that uncommon. In an article from The Economist titled, “Investors ignore world-changing news. Rightly,” the columnist points out movements like this are frequent enough to warrant a new catch phrase among investors - “The nothing ever happens market.” Or as a fellow ODIJ advisor describes it, “The shrug trade.” Investors, perhaps due to a long list of heated geopolitical events that quickly blow over and an awareness of overblown headline news stories, continue to pile into stocks amidst international turmoil.

But, as The Economist columnist points out, the “head-in-the-sand approach is a more sophisticated strategy than it first appears,” and it's been around for a long time. The writer cites research done in 1988, which captured five decades of major world-changing events. What the researchers discovered was surprising - the volatility of returns (as measured by the standard deviation) on the day of an important news event was not even three times as much as on an ordinary day. And on the flip side, several of the days with the greatest market drawdowns occurred unrelated to any obvious news story. In short, even the most alarming headline news has not predictably dictated market movements over the years.

What “the nothing ever happens market” investors seem to lean on is the historical resilience of the U.S. economy, which is notable. In the last 67 years, S&P 500 has hit all-time highs in 41 of those years. In the past decade, it has hit 305 all-time highs. While the S&P 500 is not immune to volatility, even extreme volatility, it continues to persist upward, with each downturn eventually followed by another all-time high.

The U.S. economy is not invincible, of course. There are events that could undermine the health of our economy, causing a deep upset to markets. But what investors seem to be exhibiting in response to the U.S.’s bombing of Iran and other notable events, is a strong belief that capitalism will prevail, despite these geopolitical upsets. As The Economist columnist writes, “The news that matters tends to come from the real economy or financial system—not the world’s battlefields.”

- Carrie McDonnell

https://www.economist.com/finance-and-economics/2025/06/18/investors-ignore-world-changing-news-rightly
https://media.onedayinjuly.com/media/pdf/ODIJ_AllTime_Highs.pdf