How to invest when markets are reacting irrationally to a war, oil shocks and major uncertainty

Many investors shook their heads this week wondering how markets are now higher than where they were when the Iran war started. In fact, the S&P 500 index is now up about two per cent for the year so far. Maybe not barn-burner numbers, but admittedly a pretty good showing considering we are in the middle of a war and an oil crisis.

A previous column went through some of the reasons why markets are showing resiliency in the face of never-ending bad news. Let’s look at some more strategies for investors to handle the current world uncertainty. As usual, we will discover, it often comes back down to the basics. Here, then, are five market strategies to consider during these uncertain — yet currently profitable — times.

It is a tough time in the market for analysts. That’s because, for now at least, company and economic fundamentals matter less than sentiment. A company could post very strong earnings, but one social post from U.S. President Donald Trump could result in the company’s stock moving the wrong way anyway. Investors can make more money right now guessing on sentiment rather than on fundamentals. How to handle this as an investor? Our first suggestion is: don’t guess. Unless you know what will be in the president’s next social post, a guess is all it is. If you don’t guess then you won’t react and trade excessively. The best strategy, in our view at 5i Research, is just to follow the suggestions below and wait for fundamentals to matter again. They will. They always do.

Not that long ago, investors hated energy stocks. Even though valuations were low, balance sheets were strong and dividends were growing, the sector just wasn’t exciting enough for investors looking at go-go AI and quantum stocks. Yet now, energy stocks have been about the only sector working really, really well. Investors who did not abandon the sector are now enjoying the fruits of their conviction, with the S&P/TSX composite index energy sector up about 30 per cent year to date. Diversification has once again proven its benefit to many portfolios.

Essentially, market trades have been very “crowded” in the past year. Everyone piled into AI stocks. Then, everyone piled into materials stocks. Today, everyone seems to be shorting software stocks. In terms of the Iran situation, a contrarian call might be to actually be bullish. Imagine that. The Iran war could end, earnings could be strong and inflation might not be the big problem it is expected to be. Markets could see a big rally under the right conditions, with short-covering giving investments an extra boost. Investors, on average, certainly like to worry. But those willing to put their money in when others are fleeing can do very well at times. We are not saying mortgage your house to buy stocks. But we are saying that maybe it is not the time to be too bearish, since everyone else in the world is already, and prices might already reflect that sentiment.