Here’s the cover of the NYT website this morning. Every news service looks the same.
I’ve spoken to a lot of investors over the years, and I can count on one hand the number of times we’ve spoken about geopolitical flareups. The financial media tends to overplay the importance of these events on their viewer’s portfolios, but in my experience, they generally don’t take the bait. People mostly understand that these events, while obviously serious and not to be taken lightly, should be segregated from your investment strategy.
But fine, I’ll play ball. If you had inside information that there would be a geopolitical flareup, what would you buy? The first thing that comes to mind is defense stocks, like Lockheed Martin. You could do so in an ETF, like XAR (definitely not investment advice for the love of god), which tracks the S&P Aerospace & Defense ETF. Over the last week, it gained 1.4%, while the S&P 500 fell 1.5%.
But these flareups are often short-lived, and hopefully, this one will be no different, so to make an actual investment, you’d want to know the longer-term trends of these businesses.
One of the biggest lines of business for defense stocks is arms sales, which went nuts in 2020. This report from State Street shows this spike.
Arms sales are hardly the only driver of these stocks, but still, if all you had to judge these names was this chart, you’d probably be a buyer. And you’d have had massively underperformed. The Aerospace & Defense ETF trailed the S&P 500 by 12% in 2020, and by 26% in 2021.
So back to today. Investors should spend approximately zero percent of their time adjusting their portfolios to the current geopolitical flareup. It’s a distraction to what really drives the stock market. The only thing that matters over the long term is earnings. Of course, interest rates matter and sentiment matters, and the pace of innovation matters, but they’re either inputs or outputs of earnings. Look at this chart and tell me I’m wrong.
This beautiful chart comes from a beautiful man, Tony Dwyer, who joined Josh and I on this week’s The Compound and Friends. This was such a fun conversation, I hope you enjoy it.