Don't Let Today's Soaring Markets Fool You

By Markets Fool.com


Don't let whipsawing markets cut your returns. Image source: Wikimedia Commons.

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Following the stock market on a daily basis can be a trying experience, because what seems to be a perfectly rational explanation for stocks' movements one day often proves to be completely incorrect the next. After a disappointing January in which most major market benchmarks posted substantial losses, investors have celebrated February with sustained gains. As of 2:15 p.m. EST, the Dow Jones Industrials were up more than 250 points, and the S&P 500 had gained more than 1%.

Yet before you decide that the latest scare for stock investors has ended for good, be sure to look past the day's events and try to integrate them into a longer-term perspective. Otherwise you'll just end up getting whipsawed by conflicting data that paints a different picture of what's happening in the economy.

Why markets soared Tuesday
Today's market activity featured several positive news events that built optimism about the health of the current economic expansion. Automakers released their latest sales figures for January, and all three major U.S. manufacturers showed solid gains. General Motors led the way with 18% sales growth, but Ford was close behind at 15%, and Chrysler weighed in with 14% higher sales for the month. Strength in the auto industry has reflected a long period during which Americans put off buying vehicles longer than usual, and in 2014, pent-up demand helped the industry reach its highest annual sales volume since 2006. With vehicle sales starting off 2015 on the same foot, automaker stocks jumped even more than the overall market.

Photo credit: Flickr/Paul Lowry.

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Investors celebrated a rebound in oil prices even more, as West Texas Intermediate jumped 5% to climb above $52 per barrel. That sent energy-related stocks sharply higher, as shareholders foresaw that the oil market might finally have established a bottom. Despite having seen falling production and earnings, ExxonMobil climbed more than 2% in afternoon trade, and bullish investors now seem to believe that the major oil companies will be able to weather the storm of low oil prices by cutting back temporarily on capital expenditures.

As logical as these responses seem, they're nevertheless inconsistent with the views that investors seemed to take in the recent past. On the oil front especially, many market commentators had said what a positive impact falling oil prices would have on consumers, because they would free up disposable income for consumers to use on other purchases. As a result, you'd expect investors to react negatively to an oil-price rebound, yet even in consumer stocks, today's rally has generally been strong.

Ford's new F-150 truck. Source: Ford.

Moreover, for every positive view of the economy, there's a corresponding negative view that could just as easily become the focal point of a daily market read. Today, for instance, the Commerce Department released data that said factory orders fell 3.4% in December, marking the fifth straight month of declines. As manufacturing slows, an important aspect of economic growth appears to be weakening, yet investors chose to ignore that gloomy backward-looking assessment in favor of their belief that better times lie ahead.

If anything, the message you should get from today's market moves is that investors are more confused than ever, pushing stocks sharply lower one day and higher the next. With so many different factors contributing to your big-picture look at the state of the economy and the financial markets, your biggest danger is letting a single day's events change your entire view. Only by being more patient in your assessment of the best investing opportunities can you hope to drown out market noise and come up with a viable long-term strategy that can survive the ups and downs you'll deal with every day.

The article Don't Let Today's Soaring Markets Fool You originally appeared on Fool.com.

Dan Caplinger owns shares of Ford. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.