The shares of Apple common stock peaked just after Christmas and then lost a third of their value in less than four months. They have since recovered about 17%. There are many stocks that have been more volatile but Apple is the largest company by market value in the U.S. Are we to believe the company’s fundamental value has fluctuated by this magnitude in such a short period? This shows the short-term emotional overreaction by investors during market drawdowns. Astute investors try to take advantage of quality stocks like this that go on sale.
Earnings season just started with most banks reporting higher than forecast revenues and earnings. Many companies are expected to withdraw financial guidance in light of a tariff-fueled economy. This “information vacuum” makes informed decisions more difficult. Some analysts will now make their own predictions. This could lead to a rocky earnings season with potentially big stock price swings. Cloudy guidance numbers are just estimations and do not change the business fundamentals. It may create opportunities.
TARIFFIED
We will not repeat the latest tariff news here – you can get that from other sources. Rather we hope to provide insight into investor behavior during tumultuous periods like this. Since “Liberation Day,” this has been one of the most volatile periods in market history prompted by crushing uncertainty for investors.
First, an observation: the most important trading relationship in the world, the U.S. and China, is effectively facing a mutual embargo. This may take a long time to negotiate or work out. Many of the other 100 or so countries will likely come to a negotiated settlement in the next two to three months.
It is important not to extrapolate the current policy environment although economic uncertainty merits higher volatility. In the meantime, be wary of grand conclusions being drawn from share prices that are at best in flux and at worst are completely devoid from reality. Investors should focus on what they can control in this environment. As investors, we can’t control the race but we are fully responsible for picking the best horses to run the race.
Investing and emotions don’t mix. Emotional investors tend to sell into weakness and buy only when times are good. In the moment of major market declines, it is hard to see the forest through the trees. It may seem like the sky is falling but things always work out – without exception. The proof is a continual series of all-time highs in the stock market over the last 100 years.
When volatility is this high (measured by the VIX), investors who are able to buy generally see far higher forward returns than typical. That doesn’t guarantee big gains from here, but it is one clearly bullish long-term argument supported by data.
Buying quality companies in the face of panic and uncertainty remains a viable investment strategy. We don’t pretend to pick bottoms. Rather we take a longer term view. If we expect a substantially higher stock price in 9-12 months, we are interested. Our focus now is buying less cyclical names and also those less sensitive to the trade war. They can be found at very attractive valuations.