The Iran war heated up again in July after a brief respite from the hostilities. Naturally, equity and oil markets have been volatile.
For instance, the S&P 500 (SNPINDEX: ^GSPC) index lost 0.8% in one day in mid-July following President Donald Trump’s announcement that the U.S. would renew a blockage of Iranian ships through the Straight of Hormuz.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a “Double Down” signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same “Total Conviction” signal is flashing for a company 1/100th the size of Nvidia. Continue »
Given the administration’s rapidly shifting statements and policies, it’s difficult to predict geopolitical and economic events. Still, short-term movements shouldn’t concern investors with long-term horizons.
Potentially volatile markets
Equity volatility could markedly pick up. The CBOE Volatility Index (VOLATILITYINDICES: ^VIX), which measures the S&P 500 index’s volatility, is a good measure. It’s commonly referred to as the fear gauge. The VIX stood at 18.7, compared to an average of 17.91 in June. During the early days of the war in March, VIX averaged 25.6.
On top of the unpredictable military action, Trump has also announced plans to implement tariffs. The White House recently announced that the president would place an additional 50% tariff on certain Canadian goods.
Additionally, the administration has been planning ways to implement broad-based tariffs. The Supreme Court struck down his previous attempts, so Trump imposed temporary tariffs of 10% and then new tariffs of 10% to 25% on 60 trading partners as the temporary measures expired on Friday.
The combination could create economic uncertainty, thereby raising volatility. However, that’s not necessarily a bad thing for long-term equity investors.
Long-term approach
That’s because volatility gets smoothed out over time. If you have the resources, it could also present an opportunity to buy stocks at better valuations.
For instance, if you’d invested in the S&P 500 at the start of 2007, before the Great Recession, and held on until today, you’d have earned a 659% return, including dividends. If you’re looking for something more recent, investing in the index at the start of 2020, before the world knew about the COVID-19 pandemic, would have returned 153%. And that’s without investing additional sums.
Granted, these are unusual times, making it difficult to predict how markets will perform in the short run. That’s challenging even during calm times. If you don’t have a long time frame in mind, more cautious investments, such as an allocation in short-term fixed-income exchange-traded funds (ETFs), are appropriate.
