The Herd’s Alibi: Why Markets Tolerate Chaos and Call It Rationality

MARKETS & BEHAVIOR  ·  APRIL 7, 2026

While missiles fly over Tehran and the Strait of Hormuz remains closed, the S&P 500 posts four straight days of gains. This is not a miscalculation. It is a structural alibi — and Wall Street has been perfecting it for decades.

I have been sitting here watching guest after guest on Bloomberg come on and repeat the same script to explain how the market is expecting a quick resolution to President Trump’s ongoing war with Iran. Well, I have been hearing this exact explanation for the past year. For every one of Trump’s self-inflicted crises — the tariff tantrums, the trade wars, the assassination orders, and now an active, expanding war — the chorus sings the same refrain: “The market expects a quick resolution.”

To me, this is no longer an explanation. It is a tic.

Let us be clear about what is happening right now, as of April 7, 2026. This is not a looming threat or a negotiating posture. Explosions have been heard in Tehran and the nearby city of Karaj. Israel has announced a “wave” of air strikes on Iran. Iranian missiles have been launched toward Israel, triggering air defense systems. Strikes have hit Saudi Arabia’s Jubail industrial hub, a critical center for petrochemicals that accounts for roughly 7% of the Kingdom’s GDP. The Pentagon has cancelled a scheduled briefing, adding to the uncertainty. And President Trump has set a deadline of Tuesday 8 p.m. Eastern Time for Iran to reopen the Strait of Hormuz — warning that if they do not, “the entire country can be taken out in one night” with every bridge and power plant destroyed.

“The war is not coming. It is here. It has been here for six weeks. And the market’s reaction? The S&P 500 rose 0.4% on Monday. The Nasdaq added 0.5%. Four straight days of gains.”

If market participants were truly the pattern-recognizing savants their reputations claim, they would have learned by now that Trump-era “quick resolutions” rarely materialize on schedule. The talks so far have yielded no progress. Iran has rejected the latest ceasefire proposal, demanding a permanent end to the war rather than a temporary truce. And now Control Risks, a global risk consultancy, sees no de-escalation for at least four to six weeks. Yet the Bloomberg guests repeat the same script. “Quick resolution.” At some point, repeating this mantra stops being a forecast and starts being a prayer.

So why does the market continue to look through the looking glass while the missiles are flying? The answer is not a collective miscalculation of probability. It is something far more cynical and deeply human: a structural alibi.

THE PRINCIPAL-AGENT PROBLEM IN WARTIME FINERY

What we are witnessing is a classic principal-agent problem dressed in Wall Street finery. Portfolio managers are not stupid; they are acutely aware of the escalating risks. Oil prices are perched near $110 to $115 per barrel — up roughly 80% since the war began. The Strait of Hormuz, through which a fifth of the world’s oil passes, remains effectively closed. Stagflation fears are mounting, with traders no longer pricing in any Federal Reserve rate cuts for the year. But managers are even more acutely aware of their own career risk. The modern fund manager operates under a simple, unspoken rule:

You will not be fired for losing money in a crash that everyone lost money in. You will be fired for missing a rally.

This dynamic creates a perverse incentive. By staying heavily invested — by following the herd into long positions — a manager gains a powerful downside alibi. If the market collapses as this war escalates further, the manager can point to the exogenous shock and say, “It was beyond anyone’s control. No model could have predicted this.” Clients, themselves immersed in the same news cycle, will nod in grim understanding. The manager’s career survives.

Conversely, if the manager acts on their own analytics — if they de-risk, raise cash, or short the market — and the war ends quickly or the market somehow holds, they face an unforgiving outcome: underperformance versus the benchmark. That is a cardinal sin with no alibi. The question from clients would be brutal: “You sat out the rally because of a war that was already happening?” In this framework, the asymmetric risk is clear. It is safer to be wrong in a crowd than to be right alone.

“We are back on a Trump imposed countdown clock and there’s no way to predict with any confidence what will happen … there’s not much market participants can really do but wait and see.” — unnamed analyst

THE ABS DEBACLE, REPRISED

That is not analysis. That is a shrug.

This is the very same behavioral rot that festered during the Asset Backed Securities debacle of 2008. Back then, quants and risk managers knew the mortgage tranches were built on sand. But portfolio managers saw their peers buying the same toxic paper. They knew that if the music stopped, everyone would fall together — and that collective fall would be blamed on the “unforeseeable” collapse of housing, not on individual incompetence. The alibi was the herd. The result was a financial near-apocalypse.

Today, the same herding instinct is on full display, simply draped in wartime context. The “quick resolution” narrative is not a genuine forecast; it is a shared fiction that allows the herd to keep moving in the same direction without cognitive dissonance. Each manager looks around, sees others holding steady, and reassures themselves: The herd knows what it is doing. But they forget that they are the herd. There is no wise outsider to save them. There is only the collective momentum of self-interest dressed as analysis.

We see identical patterns even in the supposedly disruptive world of crypto valuations, where prices pivot on tweets and rumors, and where the same alibi applies: “No one could have predicted that regulatory crackdown.” But that is a topic for another essay.

The uncomfortable truth is that large swaths of the market have no better idea of the near-term future than a pollster during a hurricane. What they do have is a finely tuned instinct for self-preservation. The prevailing sentiment is not a bet on peace. It is a bet on the forgiving nature of a crowd. As long as managers can point to Trump and say, “It couldn’t be helped,” they will abandon their models, ignore the patterns they claim as their fame, and march in lockstep toward the cliff — comforted only by the company they keep, even as the war rages, the deadline ticks down, and the explosions echo through Tehran.

Published April 7, 2026  ·  Markets & Behavior