Talk about a confusing and frustrating market. Following two days of gains fueled by optimism over the Iran War Resolution, Wall Street was back in selling mode Thursday morning after President Donald Trump’s prime-time address was filled with escalating rhetoric. This started the day with oil prices rising and stock prices falling. This inverse relationship has become well known since the outbreak of war on February 28th. “Last night, the president showed once again how difficult it is to own stocks here. He gave probably the most forceful speech he’s ever given, and it got people to say, ‘Listen, we’ve got to reevaluate again,'” Jim said at Thursday’s monthly meeting. But just as we were hesitant to ring the all-clear bell earlier this week, we don’t know if Thursday will be the start of a sustained decline in stocks. It is too difficult to make decisions in either direction when actions are driven by conflicting headlines from Washington and Tehran. Tenors change rapidly and so do the markets. In fact, the S&P 500 briefly reversed and rose due to market buying right after the morning session ended. Iran’s state news agency reports that Iran is drafting a protocol with Oman to “monitor transits” through the Strait of Hormuz, leading to a calming market. As of 11:30 a.m. ET, oil prices are well off the day’s highs. Naturally, there may be a growing temptation to bail out stocks until everything is resolved. Who wants to keep up with a market that changes by the minute instead of the day? But abandoning it completely has historically done more harm than good to long-term investors. Imagine if you sold everything on a Monday when the market was under pressure and hope for a resolution was fading. You would have missed Tuesday and Wednesday’s gains, when the S&P 500 index rose a combined 3.65%. Of course, this index is still more than 5% below where it was when the war began. But the point is that trading in and out of the market is a tough game. If I had sat out on Monday, it would have been mentally difficult to want to come back in those two days. Can you imagine the mental toll of the past 12 hours if you had just thrown up your hands and bought back your stocks on Wednesday afternoon? This would be like turning people away from the market en masse, or at least giving up the potential benefits of active investing. Renowned fund manager Peter Lynch once said, “Far more money is lost to investors preparing for or trying to predict a correction than to the money lost to the correction itself.” Of course, that doesn’t mean you shouldn’t adjust your exposure when risk increases. This is evidenced by Cisco’s exit on Monday, which allowed it to rebuild its cash position after a year of philanthropy. But Lynch’s comments highlight the pitfalls of trying to avoid a drawdown by taking drastic action. As long-term investors, the most important, but often the most difficult, thing we have to do is ride out the short-term pain so we don’t miss out on the gains that await us on the other side. Those gains could be delayed if the war drags on far beyond the two- to three-week timeline President Trump laid out Wednesday night. In that scenario, oil prices would likely remain high, if not rise further, raising the possibility of a significant slowdown in economic growth that would weigh on corporate profits. Remember that earnings are a guide to the stock market. Over the long term, stock prices tend to move with profits. We recognize that the tail risk of a recession weighing on earnings is higher than it was a month ago. But valid words are not destroyed, but delayed. So how do you navigate this volatile market?Next Steps Start by identifying the top 3-5 stocks that you think are attractive today, and even more attractive at lower levels. You’re looking for companies that can grow earnings despite the war, or at least companies that can handle the blow better than their peers and expect to come out even stronger when the conflict ends and the Strait of Hormuz reopens. Consider the case of glass manufacturer Corning. This is one of our bets on the firehose of AI spending. For now, it seems unlikely that the Iran war will derail the multi-year construction of AI data centers, meaning demand for Corning’s fiber optic cables will remain strong. “Can we start saying, ‘Did Corning really suffer from this?’ And sure enough, Corning opens up and then they push back,” Jim said during Thursday morning’s meeting. Once you’ve identified a stock, start identifying key interest levels. This can be more of an art than a science, so be sure to use everything from the technical tools we’ve talked about to valuing a stock at a specific level. It’s also helpful to consider scenarios in which you might need to lower your revenue forecast by, say, 10% to 20% to provide a margin of safety. The most important goal as you go through this exercise is to reduce the overall cost of each purchase. It is not necessary to use up all dry powder at the same level. Additionally, in a volatile market like the current one, we want to achieve “broader scale” with our purchases. What this means in practice: In a “normal” market, if your goal is to buy an additional stock every time it drops by 3% to 5%, you might only consider buying more if it drops by 5% to 10%. Of course, the spread of scale differs from brand to brand. For more volatile stocks, you should wait for a larger decline before making additional purchases. This technique is especially true given this week’s two-day bull market. Many stocks rose significantly on Tuesday and Wednesday. That means Thursday’s early decline is still above Monday’s closing price. The club name, Qnity Electronics, is a good example. Thursday morning’s low was about $112.57, still well above Monday’s closing price of about $107. Don’t be fooled by these movements and buy at the same level. If a stock drops 5% after recovering to the level you recently bought it at, that’s not the 5% decline you’re looking for. You want to wait until it’s down 5% to 10% from your last purchase, or down from your overall minimum purchase (depending on when you initiated the position). After all, we must remember that we have been through this situation before. Maybe it wasn’t the war with Iran, but we’ve lived through countless situations where the world seemed to be coming to an end, yet we still managed to overcome them and reach new heights much faster than we thought at the time. Back in March 2020, many would not have expected the year to end even higher. Of course, 2022 was a bad year for the market, but its losses were largely erased by the end of 2023. And exactly one year ago, when President Trump announced his “Emancipation Day” tariffs and the market crashed for several days, most people would have thought you were insane if you had told the market that this year would end much higher. But that’s exactly what happened. Remember how you felt in those markets. Perhaps for many, it’s not that different from what you’re feeling right now. Perhaps they felt even worse considering that events like the COVID-19 pandemic were unlike anything anyone alive had ever experienced before. Now consider that those who persevered were rewarded for enduring the pain, and those who accepted the decline were rewarded even more. Indeed, some people may have escaped and come back again. But there are probably many more stories of people (who were probably closer to the bottom than the top) who got out, saw the beginning of the rally, and waited for another big drop that never came. (Jim Cramer Charitable Trust is long GLW and Q. See here for a complete list of stocks.) As a subscriber to Jim Cramer’s CNBC Investment Club, you will receive trade alerts before Jim makes a trade. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in his charitable trust’s portfolio. If Jim talks about a stock on CNBC TV, he will issue a trade alert and then wait 72 hours before executing the trade. The above investment club information is subject to our Terms of Use and Privacy Policy, along with our disclaimer. No fiduciary duties or obligations exist or arise from your receipt of information provided in connection with the Investment Club. No specific results or benefits are guaranteed.
