Good morning & happy Monday!
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
– Benjamin Graham, American economist 1894-1976
I know one of the things that can be very frustrating about equity investing (AKA: investing in the stock market) is how it’s so unpredictable and often does not make any sense. Indeed, this can be frustrating for all of us … but it’s so important to realize that it is a short-term issue, not a long-term one.
Whenever a client asks me what I think the market will do in any finite period (example: a week, or month, or even a year), the only honest answer is, “I have no earthly idea.”
No one can predict short-term movements with certainty. However, history shows that over the long term, stock values grow exponentially because the profits of the companies behind them do too.
Consider this: If a company earns $1 million in profit today, its’ value might be $10 million, $20 million, or maybe more, depending on various factors. Fast forward 20 years, and if that company’s profit grows to $10 million annually, its value will likely be multiples higher. The lesson? Long-term stock market growth is driven by the rising earnings of the companies we invest in—a simple truth worth remembering.
Ok, now on to more complex matters (feel free to quit reading here, I just said the most important stuff 😉).
Recent real-life examples and international developments have provided an opportunity to explore how interconnected our financial world is and how quickly markets react … in the short term.
On June 12th Israel launched a preemptive attack on Iran who was actively in the process of building a nuclear weapon. Needless to say, this was a big deal, and the markets reacted immediately. The next day, Friday June 13th, the S&P 500 fell 1.13%, the Dow dropped 1.79%, and the Nasdaq declined 1.30%.
Markets love certainty, and wars are most certainly not certain.
Not all industries and not all companies were down on the news.
What companies would you expect to do well with news of war?
Well, oil stocks were up around 3%-4% as there were fears that oil-rich Iran’s oil output would be impacted. This would reduce global supply and cause an increase in oil prices which would benefit oil companies. So, their stocks were up on the news.
Same for defense stocks and stocks tied to gold mining companies.
What companies do you think would have been negatively impacted by this news?
Particularly hard-hit stocks were in the travel industry. Hotel stocks were down in the 2% neighborhood while cruise lines and airlines were down even more (3% – 5% down).
Why would that be?
Well, the concern would be that a war, even one 6,500+ miles away from the United States, would cause people to be fearful and reduce their travel plans.
In the case of cruise lines and airlines the fear of a reduction in travel demand is compounded by the spike in oil prices which means their costs would go up, the supply could possibly be reduced, all making less profits.
Now, what’s interesting about this whole thing is that nothing fundamentally has changed for these companies the instant the bombs started flying. Hilton is still checking in guests to their hotels, and Carnival is still sailing it’s ships. Yet, markets moved on perceived future impacts. If the news proves less severe, these stocks may rebound. If it worsens, they could face further pressure.
It’s all interconnected. A bomb dropped on the other side of the world has a ripple effect across all sorts of industries all around the globe.
But these headline dominating stories come and go. Tomorrow there will be something else that captures our attention and drives the market. As wise, seasoned investors we call that … noise. And we simply take it with a grain of salt … or better yet, tune it out altogether.
This is why short-term market reactions can be misleading. As Jason Zweig wisely noted, “The stock market is a device for transferring money from the impulsive to the patient, from the overacting to the disciplined.”
We, my friends, are the patient and the disciplined. Stay the course. By focusing on the long-term objectives and tuning out short-term noise, we position ourselves for success.
Thank you for the incredible privilege of being a part of your life. It is a source of tremendous joy in my life.
Please say the word if there is anything we can do to support you.
Make it a great week ahead.