The stock market recovery may already be happening.
Only a few days ago, commodity prices spiked up at an accelerating rate. I’m talking about things such as oil, gas, gold, platinum, copper, zinc, iron ore, lead, nickel, wheat, crude palm oil and others.
And many of those commodities had been rising along with general price inflation. Indeed, one theory is that commodity prices can be a leading indicator of inflation. In other words, they often move before the general economy. And that might be because commodity prices tend to respond quickly to general economic shocks such as increases in demand and other things.
Tentative bounces from some stocks
I reckon we saw that effect when the invasion of Ukraine happened — commodity prices spiked higher. But the interesting thing is much of that recent accelerated spike higher unwound over the past week or so. If commodity prices are stabilising, the more settled commodity market is likely to be good for non-commodity businesses. For example, their input costs could be lower.
And I think we are seeing tentative bounces in some stocks that had fallen a lot since the war in Ukraine started. Perhaps that’s related to the same factors driving commodities lower.
However, if I spend 10 minutes trying to analyse macroeconomic conditions, I’m probably wasting 10 minutes! And trying to guess when stock markets will recover is wasting another 10 minutes. The important questions to ask involve those focused on the shares we are holding and those we are interested in buying.
For example, I’m interested in the quality of an enterprise, its threats and its opportunities to grow and compound an earnings stream. I want to know if a business has operational momentum. And whether it has a defendable economic advantage in its markets.
Market movements can produce opportunities
But I do have some interest in the general movements of the wider stock market. And the main reason for that is they can provide some decent opportunities to buy and sell stocks. For example, right now, events appear to be depressing the stock market. And that suggests the possibility of finding better valuations.
And if a business can recover from a temporary setback, a lower valuation could make the stock a decent buy to hold for the long term. Or if geopolitical events don’t affect a business much, there’s a possibility a weak stock market could still pull the share price down. My plan involves searching for high-quality businesses with good long-term growth prospects. I’d aim to buy some of their shares when the market is assigning fair valuations to those enterprises. Then I’d hold them for the long term as recovery and growth hopefully unfold in the years ahead.
Of course, even that plan is no guarantee of a positive investment outcome because all shares carry risks as well as positive potential. However, I’m inclined to embrace the risks in the pursuit of long-term gains. And I think we have a better environment for choosing shares now than we had when markets and valuations were riding high.
