Stocks Are Wobbling. Follow These 3 Rules for Better Returns.

Suddenly, stocks look shaky. After briefly touching 40,000 earlier this month, the Dow has since shed more than 1,000 points, as worries flare about where interest rates are headed next . The index posted another loss on Wednesday, down 411 points, or 1.06%, to 38,442.

While volatility can be frustrating. It has always been part of the two-steps forward, one-step back nature of the stock market. So keep in mind: Stocks may still have room to run , and they perform their best when investors feel least confident.

Here are three smart rules for interpreting the current market culled from new stock research.

Don’t assume the market is in a bubble

Anytime the market hits a new high, then pulls back sharply, it’s natural to wonder: Could it be all downhill from here? It isn’t an idle concern. Even after the recent dip, stocks are trading at more than 25 times trailing 12-month earnings, their highest level since 2021, according to FactSet.

Still, investors shouldn’t necessarily assume the market has become irrational, suggests a recent note by Leuthold Group, a stock research firm known for compiling dozens of bespoke indicators to measure market sentiment.

Leuthold recently compared large capitalisation stock prices to four separate valuation thresholds it thinks mark out bubble territory.

The results? This year, prices have approached three of these thresholds—one focused on forecast earnings, one based on average earnings and one based on cash flow. But after getting close, stocks didn’t blow through these thresholds as might be expected during a bubble. Instead, they stalled or pulled back. “‘Resistance’ proves formidable,” the firm concluded, citing a term common in technical analysis.

The fourth valuation threshold, which Leuthold calls “P/E on trailing peak GAAP EPS” has yet to be reached. The indicator compares stock prices not to companies’ most recent earnings, but to the market’s record for earnings, in this case set in the first quarter of 2022.

While stocks are trading at 25 times their peak earnings—a very high figure by historical standards—they are still below the 30 times level Leuthold thinks signals bubble territory. The upshot: “We don’t think U.S. large caps quite qualify as a mania,” writes Chief Investment Officer Doug Ramsey.

Don’t sweat the short-term

It’s natural after a short, sharp pullback to worry where the market is headed next. But trying to make short-term market calls is usually a fool’s errand, according to Trivariate Research, another investment firm.

Trivariate recently tested more than two dozen stock market metrics it says are commonly used to predict short-term stock market declines. These indicators included the S&P 500 put-to-call ratio, mutual fund flows, the futures-based VIX fear gauge, the price of oil and more.

The results were “terrible,” according to the firm. “The factors’ large loss predictions were correct at about the same rate as random selection,” Trivariate said in its note.

The firm found that during many months when signals like the VIX and the Conference Board’s Leading Economic Indicators Index predicted a big drop, the market actually showed bigger-than-average gains. The indicators were signalling volatility not declines, the firm noted.

In another test, a model that Trivariate built based on several other indicators also wasn’t much help either. When the model predicted a large stock market loss, defined as a 2.5% monthly drop, the decline failed to materialise 60% of the time.

Do embrace the uncertainty

While uncertainty isn’t always comfortable, it can be to investors’ advantage. If you are willing to run with it.

Retired Wall Street economist Jim Paulsen points to a metric known as the Monetary Policy Uncertainty Index , which tallies newspaper reports and other data to measure uncertainty about what the Fed will do next.

Since 1985 the index has averaged just under 100, but since 2020 it has been elevated most of the time. It’s currently at 144, a higher level than during about 80% of its history.

Still, Paulsen argues this is good news. He compares the Fed’s Jerome Powell era, where the index has averaged 110, to eras of three earlier Fed Chairs: Ben Bernanke, Janet Yellen, and Alan Greenspan, where it averaged about 75.

Investors have been rewarded for enduring the lack of clarity. The S&P 500 has posted average annual returns of more than 12% during Powell’s term, compared with less than 10% under his three predecessors, according to the note.

“All investors long for clarity,” Paulsen writes. “But the stock market never does that well when you and I are comfortable. The great bulk of the returns generated by the stock market typically occur when most are still in their bunkers waiting for conditions to improve.”

Former New Hampshire Gov. Chris Sununu delivered a warning to Treasury Secretary Scott Bessent during a recent visit to Washington: Already-high airfares will surge if the war in Iran doesn’t end soon.

Sununu, a Republican who represents some of the biggest airlines as president of the industry group Airlines for America, has for weeks sounded the alarm to Trump administration officials about the economic fallout from high jet fuel prices. The war, Sununu has argued, must come to a close soon, or things will get worse.

Administration officials have gotten the message.

Privately, President Trump’s advisers are increasingly worried that Republicans will pay a political price for the rising fuel costs, according to people familiar with the matter. Many of those advisers are eager to end the war, hoping prices will begin to moderate before November’s midterm elections.

The fallout from the U.S.-Israeli attack in late February has slowed traffic through the Strait of Hormuz, a vital shipping lane, triggering a sharp increase in oil, gasoline and jet-fuel prices.

That means consumers are grappling with high costs ahead of the summer travel season, as they consider vacation plans.

Sixty-three per cent of Americans said they put a great deal or a good amount of blame on Trump for the increase in gas prices, according to a new poll conducted by NPR, PBS and Marist.

More than 8 in 10 Americans said struggles at the gas pump are putting strain on their finances.

Jet-fuel prices roughly doubled in a matter of weeks after the war began, and they have remained high. Airlines have said that will add billions of dollars of additional expenses this year, squeezing profit margins.

U.S. airlines spent more than $5 billion on fuel in March—up 30% from a year earlier, according to government data.

Carriers have been raising ticket prices, hoping to pass the cost along to consumers, and they are culling flights that will no longer make money at higher price levels.

In March, the price of a U.S. domestic round-trip economy ticket rose 21% from a year earlier to $570, according to Airlines Reporting Corp., which tracks travel-agency sales.

So far, airlines have said the higher fares haven’t deterred bookings and they are hoping to recoup more of the fuel-cost increases as the year goes on.

Earlier this week, Trump said the current price of oil is “a very small price to pay for getting rid of a nuclear weapon from people that are really mentally deranged.”

Secretary of State Marco Rubio told reporters that if Iran got a nuclear weapon, the country would have more leverage to keep the strait closed and “make our gas prices like $9 a gallon or $8 a gallon.”

Trump has taken steps in recent days to bring the war to an end. Late Tuesday, the president paused a plan to help guide trapped commercial ships out of the Strait of Hormuz, expressing optimism that a deal could be reached with Iran to end the conflict.

Crude oil prices fell below $100 a barrel on Wednesday, after reports that Iran and the U.S. are working with mediators on a one-page framework to restart negotiations aimed at ending the conflict and opening the strait.

Sununu said Trump administration officials are conscious of the economic fallout from the war: “They get it…and I think that’s why they’re trying to get through the war as fast as they can.”

But he cautioned that it could take months for prices to return to prewar levels.

“Ticket prices won’t go down immediately” after the strait is fully reopened, Sununu said. “You’re looking at elevated ticket prices through the summer and fall because it takes a while for the prices to go down.”

Since the initial U.S.-Israeli attack in late February, Sununu has met in Washington with National Economic Council Director Kevin Hassett, representatives from the Transportation Department and senior White House officials.

A White House official confirmed that Hassett and Sununu have discussed the effect of increased fuel prices on the airline industry. The official said the conversation touched on how the industry can mitigate the impact of high jet fuel prices on consumers.

“The president and his entire energy team anticipated these short-term disruptions to the global energy markets from Operation Epic Fury and had a plan prepared to mitigate these disruptions,” White House spokeswoman Taylor Rogers said, pointing to the administration’s decision to waive a century-old shipping law in a bid to lower the cost of moving oil.

Rogers said the administration is working with industry representatives to “address their concerns, explore potential actions, and inform the president’s policy decisions.”

A Treasury Department spokesman pointed to Bessent’s recent comments on Fox News that the U.S. economy remains strong despite price increases. The spokesman said Treasury officials have met with airline executives, who have reaffirmed strong ticket bookings.

“We’re cognizant that this short-term move up in prices is affecting the American people, but I am also confident, on the other side of this, prices will come down very quickly,” Bessent told Fox News on Monday.

The war has already contributed to one casualty in the industry: Spirit Airlines. Company representatives have said they were forced to close the airline because the sustained surge in jet-fuel prices derailed the company’s plan to emerge from chapter 11 bankruptcy.

The Trump administration and Spirit failed to come to an agreement for the company to receive a financial lifeline of as much as $500 million from the federal government.

Transportation Secretary Sean Duffy has argued that the Iran war wasn’t the cause of Spirit’s demise, pointing to the company’s past financial struggles, as well as the Biden administration’s decision to challenge a merger with JetBlue.

Other budget airlines have also turned to the federal government for help since the U.S.-Israeli attack. A group of budget airlines last month sought $2.5 billion in financial assistance to offset higher fuel costs, and they separately wrote to lawmakers asking for relief from certain ticket taxes.

Stocks Are Wobbling. Follow These 3 Rules for Better Returns.

Don’t assume the market is in a bubble

Don’t sweat the short-term

Do embrace the uncertainty

Administration officials have spoken to the airline industry, which has voiced concerns about the rising costs.