Don't Let the Bowl Break

A crisis erupts. Stock markets fall. Gold and the dollar rise. By now everyone knows this market reflex by heart. No matter how accustomed we become, a crisis still triggers panic and selling begins. Those holding stocks—especially in risky markets—tend to sell first. As sales accelerate, stock markets in those regions decline.

The second wave follows quickly. The proceeds from these sales are converted into dollars and transferred out of the country. As demand for dollars rises, the USD/local currency exchange rate increases. Even citizens who do not normally invest in the stock market start converting their savings into dollars or buying gold when they see the dollar climb. This, in turn, pushes exchange rates and gold prices even higher.

One might assume that if a crisis originates in the United States—or if the US itself is the source of the crisis—the dollar would weaken. Yet the opposite often happens. Foreign investors who hold assets in emerging markets typically convert their funds into dollars when they withdraw in order to avoid risk. As a result, the dollar rises rather than falls.

During the recent US–Israel–Iran war, for example, the Dollar Index (DXY) did not decline; it rose modestly. A similar pattern appeared in US Treasury yields. By contrast, US stock markets—led by the Dow Jones Industrial Average—had entered a downward trend. As of yesterday, however, they too began to recover.

Observing the market’s reaction, Goldman Sachs CEO David Solomon expressed his surprise:

“I look at the market reaction and, frankly, I would have expected a sharper reaction to an event of this magnitude.”

In fact, this surprise points to something that is not entirely new. Since the early twenty-first century, when capital movements became fully liberalized, the market’s response to crises has gradually evolved. Modern financial markets cannot avoid crises, but they have become increasingly adept at digesting them quickly—and often turning them into opportunities.

For today’s fund managers, the US–Israel–Iran war is merely a “change in parameters.” When war risk rises, algorithms instantly exit aviation stocks and move into defense companies. The money does not leave the system; it simply changes clothes. This rotation prevents the overall market index—the water in the bowl—from draining.

Things are very different for investors in the real economy. A factory, a hotel, or an airline cannot relocate or transform itself overnight. Consider those invested in tourism or aviation. If a war lasts longer and becomes more serious, the losses they face can be long-lasting and costly. Nor is it easy for such investors to abandon their businesses—especially in an environment where no buyers can be found for tourism or airline companies.

What I am referring to here are........

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