Attempting to predict the S&P 500’s near-term outlook is a hugely challenging task. The stock market’s short-term performance is likely to be closely linked to news flow regarding Covid-19 cases, which may prove to be impossible to accurately anticipate.
Instead of trying to second-guess the benchmark index’s movements, you may be better off accepting that uncertainty is a key part of the stock market.
Through buying and holding quality stocks, you can benefit from their long-term growth potential. This may be a more profitable strategy than aiming to foresee short-term price movements across the wider stock market.
Unpredictability is a constant
Predicting when a bear market or a bull market will occur has always been a tough call for investors. There are a range of variables that can either positively or negatively impact stock prices.
For example, one-off events such as a pandemic or a geopolitical development can quickly cause a downward movement in stock prices. Likewise, investor sentiment can quickly improve following a market crash – even if short-term economic prospects are challenging.
Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) CEO Warren Buffett (Trades, Portfolio) accepts that declines in stock prices are regular occurrences that cannot be accurately foreseen. The renowned investor once said:
“The years ahead will occasionally deliver major market declines -- even panics -- that will affect virtually all stocks. No one can tell you when these traumas will occur.”
Adopting the same attitude toward the S&P 500’s future prospects could be a logical step for investors to take. Risks such as a second wave of the coronavirus and its potential to spread on a larger scale into a wider range of countries means there is the potential for further market downturns that are impossible to predict.
Limited control
Accepting that unpredictability is a central tenet of investing may cause you to feel a lack of control when it comes to the performance of your portfolio.
Investors such as Benjamin Graham, however, embraced the unpredictability of the stock market. Graham once said, “You will be much more in control, if you realize how much you are not in control.”
Although the short-term direction of the stock market is impossible to accurately predict, you can allocate your capital to the most attractive destinations at a specific time. For instance, buying businesses with solid balance sheets and dominant market positions may strengthen your portfolio’s ability to withstand bear markets. It may also improve your returns during bull markets.
Through buying the most attractive stocks available at any given moment and accepting short-term volatility, you can obtain a relatively attractive long-term risk-reward ratio for your portfolio.
History repeats itself
Short-term share price movements may be impossible to predict, but the long-term growth potential of the stock market is likely to be positive. Its past performance has shown it is capable of recovering from a wide range of crashes to post strong recoveries. Therefore, investing now while stocks offer good value for money in many cases may lead to high returns in the future.
Investors such as Charlie Munger (Trades, Portfolio) rely on the stock market’s long-term history as a guide to its future prospects. As he once said, “There is no better teacher than history in determining the future”.
Ascertaining when the S&P 500 will fully recover may not yield a clear or definitive answer at the moment,bBut buying quality companies at low prices is likely to produce strong capital growth in the future – just as it has done since the stock market was created. The cost to investors, as ever, is short-term volatility and a high degree of uncertainty.
Disclosure: The author has no positions in any stocks mentioned.
Read more here:
- Unearthing Quality Stocks in a Market Crash
- Successful Investing in a Bear Market
- 4 Tips From Peter Lynch to Help You Overcome Market Uncertainty
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