Key Points
Wall Street is an emotional place, with investors often moving like lemmings when something notable takes place. That’s not inherently bad, given that the geopolitical conflict in the Middle East has dramatically increased uncertainty in energy markets. However, if you think long-term, you need to put higher oil prices into a larger context. Here’s what long-term investors are watching.
Higher oil prices: This too shall pass
If you look back at the history of oil prices, you will see that periods of rising energy prices are followed by periods in which prices are falling. Oil and natural gas are commodities driven by supply and demand, so that only makes sense. Right now, there is concern about energy supplies, and the prices of these commodities are on the rise.
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If history is any guide, the geopolitical conflict will eventually end, and energy prices will retreat again. Even if the conflict lingers, energy markets will likely start to adjust by increasing supply elsewhere. So energy prices may not rise as high as some market watchers are warning. And even if they do, they probably won’t remain there forever.
While some investors are rushing into energy stocks like Diamondback Energy (NASDAQ: FANG), which produces around 970 MBoe a day in the United States, to take advantage of the energy spike, that trade probably won’t be as desirable for an investor who thinks long term. When the energy market returns to a more normal state, Diamondback’s stock price will likely pull back just as sharply as it has risen.
The market volatility could be opening up other opportunities
Higher energy costs will ripple through the economy, likely driving inflation higher. Consumers are already concerned about a recession, which has led to budget tightening. Notably, lower-priced stores like Dollar Tree (NASDAQ: DLTR) are seeing strong sales growth, thanks at least partly to worried higher-income consumers trading down.
A recession would be bad news for consumers and investors. However, just like oil prices, the economy has always returned to normal after an economic downturn. If you think long term, a recession, which would likely be accompanied by a bear market, could be an opportunity for you to pick up stocks at bargain prices. Consider making a wishlist of stocks you would like to pick up so you are prepared to buy when everyone else is selling.
Today is a point in time, not the end of time
Basically, long-term investors aren’t panicking over today’s events. They recognize that the dislocations impacting the markets today are going to be temporary, if history is any guide. And that opens them up to investing differently from the crowd as they prepare for what comes next, not what is happening right now.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
