Fear and Opportunity
The war in Iran has triggered skyrocketing oil prices. You may have noticed that prices at the gas pump have risen from about $3 to about $4 per gallon in the past month, depending on where you live. It’s no secret why—the ongoing conflict in the Middle East has caused all kinds of supply issues, as well as uncertainty about the future.
The downstream economic effects of rising energy prices are potentially significant. Elevated gas and energy prices drive up inflation. As households are forced to spend more on these necessities, they’re often forced to cut spending in other areas. This leads to reduced consumer spending, which is a primary ingredient in GDP growth.
Moreover, many publicly traded companies rely on gas and energy to run their businesses. Take a company like FedEx or Delta as extreme examples of the kinds of companies whose costs are closely tied to oil prices. Spending more on energy reduces profits, making some companies less attractive for investors.
The Fear
These possible outcomes are already being reflected in the stock market. As of March 27, the Nasdaq and Dow Jones Industrial Average are down over 10- percent from their most recent peaks, which means we are now in a stock market correction. It’s a rational market reaction to an increasing likelihood of recession, higher inflation, and lower corporate profitability.
What I’m hearing from investors is a lot of fear. This is totally justifiable, as we see our investment accounts declining in value and we worry about whether the war has any end in sight.
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And the Opportunity
It’s the perfect time to remember the words of legendary investor Warren Buffett: “Be greedy when others are fearful.”
Despite the higher likelihood of recession, the fundamentals of the companies in the U.S. stock market remain strong. Most of the recent downturn in the stock market has not been accompanied by any hard data from companies. We’re in a lull between earnings announcements, so we haven’t heard from the companies themselves about what they are facing. So far, it’s all conjecture about how companies will fare.
Take the case of a company like Microsoft. Its stock makes up a large share of the U.S. stock market, at almost 5 percent of the S&P 500 Index. Microsoft is currently down 26 percent this year and more than one-third off its peak from October.
But what has fundamentally changed for Microsoft? Yes, AI threatens an important segment of its business. And perhaps consumer weakness will accompany an economic slowdown. But Microsoft had revenue of more than $300 billion last year, an operating margin of 47 percent, and year-over-year revenue growth of more than 15 percent.
Those figures are astounding—and yet the company now trades at a 30-plus percent discount relative to where it was just six months ago. This is not a recommendation to buy Microsoft, mind you—just a good example of how a correction can make an otherwise unchanged company a potentially better value).
Let’s say you were looking to buy a house six months ago. You found a house you really liked for $600,000, but it wasn’t quite the right time to buy. Now, things have changed in the market—people are nervous about the economy and gas prices, interest rates have risen, and uncertainty is high. Let’s say the house you loved for $600k is now selling for $400k. Most people would think that’s a great deal. Nothing else about it has changed.
Why don’t we treat stocks the same way? Microsoft is selling for over 30 percent less than it was a few short months ago. Shouldn’t we get excited about buying it at a “discount” relative to its previous value?
I understand the fear, and I’m scared too. But running away from markets when they have declined is the exact opposite reaction that we should have. It’s an opportunity for investors to buy companies, or a basket of stocks, at more reasonable prices.
Does this mean I think the market will stop declining? I have no idea—it could easily slide for another week, month, or even a year. But markets have always recovered historically, and the investors who fared best through past crises were the ones who resisted panic.
The war in Iran is real, the fear is justified, and the uncertainty is uncomfortable. But discomfort has historically been the price of admission for long-term gains. If you can stomach the volatility, this may be a moment you'll look back on as an opportunity.