The mood of the stock market is changing fast during Iran war. How to navigate the confusion
Talk about a confusing and frustrating market. After two days of gains fueled by optimism about his decision to go to war with Iran, Wall Street returned to selling mode Thursday morning after President Donald Trump’s first speech was filled with escalating rhetoric. This caused oil prices to rise and stocks to start the day lower; The adverse relationship we know very well since February 28, when the war began. “Last night, the president showed you once again how difficult it is to own stock here because he gave you probably the harshest speech you could ever get, which caused people to say, ‘Look, I need to reevaluate one more time,'” Jim said at Thursday’s Monthly Meeting. But just as we were hesitant to ring the all-clear bell earlier this week, we’re not sure Thursday is the start of a sustainable decline for stocks. With action being driven by conflicting headlines from Washington and Tehran, it’s very difficult to make a call either way. The tenor is changing rapidly and so is the market. In fact, shortly after the Morning Meeting ended, we saw some dip buyers step in and the S&P 500 briefly turn green. Iran’s state news agency reports that Iran has drafted a protocol with Oman to “monitor the transit” of the Strait of Hormuz, which has helped calm markets. Oil is very close to the highest levels of the day as of 11:30 GMT. Understandably, the temptation to bail out stocks may be growing until everything is sorted out. Who wants to keep up with a market that changes not only day by day, but minute by minute? But throwing in the towel completely is something that has historically harmed long-term investors rather than protected them. Consider if you sold everything on Monday, when the market was under pressure and prospects for resolution were slim. You would have missed the gains on Tuesday and Wednesday, when the S&P 500 gained a combined 3.65%. Of course, the index is still more than 5% below where it was when the war began. But the point is, getting in and out of the market is a tough game. If you were pulled over on Monday, it would have been emotionally difficult to ask to come back in the last two days. Can you imagine the emotional toll of the last 12 hours if you had thrown up your hands and bought the stock back on Wednesday afternoon? This is the kind of thing that causes people to walk away from the market all together, or at least give up on the potential rewards of active investing. Famous fund manager Peter Lynch once said: “Investors who prepared for corrections or tried to anticipate corrections lost far more money than was lost in corrections.” Of course, that doesn’t mean you shouldn’t adjust your risk when the stakes rise, as our exit from Cisco on Monday showed; this helped us rebuild our cash position following our annual charitable distribution. But Lynch’s words reinforce the pitfalls of trying to avoid downturns by making dramatic moves. The most important, but often most difficult, thing we have to do as long-term investors is to absorb the short-term pain to ensure we don’t miss out on the gains that await us on the other side. Those gains could be delayed if the war escalates well beyond the two-to-three-week timeline Trump suggested Wednesday night. In this scenario, oil prices would likely remain high even if they did not rise further, increasing the likelihood of a major slowdown in economic growth, negatively affecting corporate profits. Remember, earnings are the guiding light of the stock market. Over the long term, share prices tend to follow profits. We acknowledge that the risk of a recession weighing on earnings is higher than it was a month ago. But the operative word is postponed, not destroyed. So how do we act in this volatile market? Next steps Start by identifying the top three to five stocks that you think are attractive right now, and consider even more attractive at lower levels. What you’re looking for are companies that can grow earnings despite the war, or at least companies that you expect to absorb the blow better than their peers and emerge stronger when the conflict ends and the Strait of Hormuz reopens. Consider the case of glass manufacturer Corning, whose AI spending is one of our bets on the firehouse. Right now, the Iran war seems unlikely to derail the perennial AI-built data center, which means demand for Corning’s fiber optic cables should remain strong. “‘Is Corning really hurt by this?’ Can we start saying? And of course Corning opens up and then rebounds,” Jim said on Thursday’s Morning Meeting. Once you’ve identified the stock, start identifying key interest levels. This would be more art than science; so make sure you use everything from the technical tools we’ve discussed in the past to what the stock’s valuation will be at certain levels. It may also be useful to consider scenarios where earnings estimates need to be reduced by, say, 10% to 20% to give yourself a margin of safety. When doing this exercise, the overall goal of each purchase is to reduce your overall cost base. You don’t want to use all your dry powder at the same levels. We also want to apply “wider scale” with our purchases in volatile markets like the current one. What this means in practice: If our goal in a “normal” market is to buy more on every 3% to 5% decline, we might only consider additional purchases on 5% to 10% declines. Of course, the scales will expand differently for different names, and more volatile stocks will require us to wait for larger declines before making additional purchases. This technique is especially true considering this week’s two-day rally. Many stocks posted big gains on Tuesday and Wednesday; This means that even Thursday’s early declines keep them above where they closed on Monday. The club’s name, Qnity Electronics, is a good example of this. At Thursday morning’s low near $112.57, it was still well above Monday’s close near $107. Don’t let these moves fool you into buying at the same level. If a stock falls 5% after a rally to your last purchase level, then that’s not the 5% decline you’re looking for. You want to expect a drop of 5% to 10% below your previous purchase, perhaps even your lowest overall purchase (depending on when you initiated the position). At the end of the day, we have to remind ourselves that we have encountered situations like this before. Maybe it wasn’t a war with Iran, but we’ve been through countless situations where the world has seemingly ended, and yet we’ve managed to overcome them and move on to new heights; often much more quickly than seemed possible at the time. In March 2020, not many people could have predicted that we would end that year on a higher level. Of course, 2022 was a bad year for the market, but by the end of 2023 the losses had largely disappeared. And exactly a year ago, when Trump announced “Emancipation Day” tariffs that roiled markets for several days, most people would have thought you were crazy if you said the market would end the year higher. But that’s exactly what happened. Think about how you feel in these markets. For most people, the situation is probably not that different from how you feel right now. They probably felt even worse, given that events like the Covid-19 pandemic were events no living person had ever seen before. Now consider that those who endure are rewarded for their endurance of pain, while those who buy the fall are rewarded even more. Of course, some may have gone out and gone back in again. However, there are likely to be many more stories of those who got out (probably closer to the bottom than the top), witnessed the beginning of the rally, and waited for another big pullback that never came. (Jim Cramer’s Charitable Trust is long GLW and Q. See here for a full list of stocks.) When you subscribe to the CNBC Investment Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trading alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim talked about a stock on CNBC TV, he would wait 72 hours after issuing the trading alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH THE DISCLAIMERS. NO CIVIL OBLIGATIONS OR DUTIES EXIST OR SHALL BE RESULTING FROM YOUR RECEIVING ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULT OR PROFIT CAN BE GUARANTEED.
