The outlook for the economy and stock market have deteriorated in recent months. Indeed, high inflation and rising interest rates that are expected to further increase have the potential to cause more difficult operating conditions for many industries. As a result of this and heightened geopolitical risks in Europe, the outlook for the equity market is also highly challenging.
Just because the economic and stock market outlook is downbeat does not mean further pain is necessarily ahead for investors, however. Economic growth and the performance of the stock market could be much better, or much worse, than current forecasts. Ultimately, only time will tell because it is impossible to accurately estimate how the infinite number of variables that affect the stock market will interact with one another.
Focusing on the right areas
As a result, I firmly believe there is little to be gained from trying to predict the short-term economic and stock market outlook. For the most part, it is random and investors who spend time trying to predict it are unlikely to be correct on a consistent basis.
Instead, I think it is much more logical to focus on identifying sound companies that have long-term growth potential. They are likely to survive a period of worsening economic performance, should it arise, and capitalize on long-term growth opportunities. Moreover, buying such companies when they trade at low prices provides greater scope for capital gains over the long run.
Such sentiment is often shared by value investors. For example, Pershing Square founder Bill Ackman (Trades, Portfolio) said, “Short-term market and economic prognostication is largely a fool’s errand, we invest according to a strategy that makes the need to rely on the short-term market or economic assessments largely irrelevant.”
A structured approach
In my opinion, using a structured approach to identify high-quality stocks that trade at low prices is an excellent strategy. For example, investors may run through a series of "checks" to ensure any company they purchase offers financial strength, a wide economic moat, a solid long-term growth strategy and good value for money based on historical levels and peer group analysis.
Once such companies are identified and purchased, an investor can sit back and allow the economy and stock market to do the heavy lifting. Indeed, the economy might be in a recession today, but has an excellent track record of delivering buoyant conditions that are conducive to profit growth for a wide range of industries.
Since the stock market has produced an annualized total return in excess of 10% over the past 30 years, buying and holding high-quality companies and allowing compounding to work its magic is a sound overall strategy. Focusing on putting it into practice, instead of engaging in frivolous short-term economic predictions, is a very sensible move.
