The conflict in Israel has not ended, but the market has already moved on!

This week's trading data tells a shocking story. As Israel and Iran continue to attack each other, gold prices have fallen, U.S. Treasury yields have risen, and stock market volatility has plummeted. The performance of stocks relative to long-term bonds has reached its strongest level since Trump's inauguration.

These are all typical signals of a "risk-on" environment. Israel's attack on Iranian nuclear facilities has long been viewed as the "ultimate event" that could severely worsen the global risk environment; however, oil prices not only fell on Monday but are also far below the peak in January.

There may be reasons for the market's calm. Harry Colvin from Longview Economics in London points out that the impact of Middle Eastern conflicts on markets and the global economy primarily transmits through oil prices, and Israel has chosen a "good" time. Oil inventories are rising, OPEC+ countries have been trying to limit supply, and many nations are eager to find excuses not to enforce production cuts.

Although history shows that stock markets can quickly recover after geopolitical shocks, experts warn that market complacency is dangerous, with tail risks such as Iran's nuclear breakthrough still present. Notably, Bitcoin has exhibited characteristics of a safe-haven asset during this crisis, outperforming gold amid the turmoil.

Reasons for Calm: Oil Inventories and Historical Experience

Historical data shows that the oil market often anticipates the Israel-Iran conflict and prices in advance. Crude oil typically peaks when news breaks and then retreats. This was the case during the missile exchanges last April, and a similar script may play out again.

More importantly, history indicates that oil prices need to double to trigger a recession in the West. Nicholas Colas from DataTrek International points out through data from the St. Louis Fed that all recessions from 1987 to the pandemic period followed a doubling of oil prices.

Given that the recent low was $57.50, West Texas Intermediate crude needs to reach $115 to potentially trigger a recession—currently, it is only $70.

Jim Reid from Deutsche Bank provides a reassuring statistic: Historically, the S&P 500 index typically drops about 6% in the three weeks following geopolitical shocks, but fully recovers in the subsequent three weeks. The bank's researchers listed 32 political events since 1939, showing a median bottoming period of 16 trading days, after which it fully recovers in 17 days.

The Danger of Complacency: Tail Risks Remain

However, Tina Fordham from Fordham Global Foresight warns:

"The market seems to believe that risks have been completely eliminated, which is a mistake."

Matt Gertken from BCA Research believes that Israel's attacks "will continue until Iran is forced to strike regional oil supplies to compel the U.S. to restrain Israel." Andrew Bishop of Signum Global Advisors provided a probability analysis: a 20% chance of Iran preemptively surrendering, a 45% chance of Iran surrendering after Israel achieves its goals, a 25% chance of U.S. intervention, and a 10% chance of Iran achieving a nuclear breakthrough. Although there is a two-thirds probability of outcomes that are harmless to the market, the 10% chance of a nuclear-armed Iran, especially with the imminent risk of regime change, is still sufficient to warrant at least a reduction in some positions.

Bitcoin's Safe-Haven Transformation

In this crisis, Bitcoin has once again performed remarkably. The sell-off triggered last Thursday due to the escalation of hostilities between Israel and Iran was brief, followed by a surge of 4.9% on Monday, outperforming gold, which fell nearly 1%. As of the time of writing, Bitcoin has risen to $106,987 per coin.

This stands in stark contrast to the approximately 13% drop in Bitcoin during the Israel-Iran conflict last April. Analysts at Frnt Financial noted that the safe-haven characteristics of Bitcoin for 2025 are being communicated to audiences through factors such as U.S. Vice President JD Vance's declaration that "Bitcoin is becoming a strategic asset for the United States."

In the new regulatory environment, companies like Fidelity Digital Assets, Franklin Templeton, and BlackRock have begun to integrate these principles into their cryptocurrency strategies. This has made Bitcoin a more traditional and institutionalized asset than its founders envisioned—yet it has indeed performed better in times of crisis.

The market may ultimately prove its calmness to be correct, but the current risks that investors are taking remain too high relative to the probabilities of adverse outcomes. At the geopolitical gambling table, even low-probability catastrophic events deserve more respect