Wall Street is prone to emotional swings, often led by big news events. Geopolitical issues are often a driver of mood changes among investors. While some investors try to ride these emotional waves, most will be better off focusing on the long term. Here are some better ways to look at the market in times of increasing turbulence.
There's always a story in the market
Investors like big stories, which can and do result in material financial shifts in the market. For example, oil prices can be affected by news from OPEC. This largely Middle East oil group often increases and decreases production levels in an effort to control the global supply and price of this vital energy source. Since oil is such a vital part of the revenue OPEC members' countries generate, it makes sense that the countries would want to have some influence on the energy markets.
Brent Crude Oil Spot Price data by YCharts.
As you might expect, cutting production (which reduces supply) tends to result in a knee-jerk reaction among investors that increases the price of oil and, by extension, the price of energy stocks. OPEC has been limiting supply of late. That's resulted in oil prices rising for several months and some nice gains for companies like Chevron (CVX 0.37%).
More recently, geopolitical upheaval in the Middle East has resulted in big investor sentiment shifts. In just a single day, investors changed their view of the aerospace & defense sector and defense industry giants like Lockheed Martin (LMT -0.75%).
It isn't in an investor's best interest to try to ride these often drastic mood swings, which often end up being short-term in nature. It is far better to invest for the long term.
Focus on the long term
Both Chevron and Lockheed Martin are industry leaders in their respective sectors. That fact was true before world events led investors to rush into the stocks, boosting their prices. Instead of following the crowd here, it would be much better to step back and consider the long-term potential and business history of each company.
For example, Chevron has the lowest leverage among its closest peer group. It has used its strong financial position to navigate the ups and downs of energy prices for years. When times are tough, it takes on debt, which it pays off when energy prices improve again. This is part of the reason why this integrated energy giant has been able to increase its dividend annually for 36 consecutive years.
CVX Debt to Equity Ratio data by YCharts.
If you are looking at the energy sector, it would be much better to buy and hold a financially strong industry leader like Chevron than to try to market-time fickle shifts in investor sentiment. The other option, of course, is to simply buy an exchange-traded fund (ETF) like Vanguard Energy Index ETF (VDE -0.80%). It is a way to add exposure to the sector without having to pick individual stocks at all. Just don't look at it as a short-term investment, or you'll basically be market-timing.
A similar thing can be said for iShares US Aerospace & Defense ETF (ITA 0.40%). If you want to have exposure to the sector without trying to cherry-pick stocks, an ETF with such specialized exposure is a quick way to add the area to your portfolio. But you could also simply look to own historically well-run companies like Lockheed Martin, which has increased its dividend annually for 21 consecutive years.
Note that defense is a major portion of most countries' budgets, so there is a strong underpinning to its business. Add in the innovation that tends to drive the sector, and the future seems bright without even considering outside events. The goal, however, is to own the stock, or an aerospace & defense ETF, for decades, not the days, weeks, or months that often typify Wall Street's emotional swings.
Don't get caught up in Mr. Market's moods
Benjamin Graham, the man who helped to train Warren Buffett, liked to describe a fictional person called Mr. Market. When Mr. Market is in a dour mood, he will sell stocks cheaply, while at the other emotional extreme, he will pay high prices. Graham was clear that it was pretty much impossible to predict Mr. Market's mood on any given day. His suggestion was to focus on a company's fundamental value instead.
In other words, just because a sector is hot today doesn't mean it is worth buying. You are probably far better off thinking long-term and trying to buy when Mr. Market is depressed and selling stocks, or entire sectors, on the cheap.
