Smart investors will use a weak economy to find great investments at a low price. If you’re looking for ways to invest in these market conditions, start buying these great investments while others are selling them.
Look ahead not in the rear-view mirror
It is important to remember that the stock market is always forward-looking, while economic data is historical. That means the stock market is normally the price of future growth, not historical returns. Sometimes an economy can struggle but prospects for the future start to improve and that causes optimism even if the economic data continues to show bad news in the short term. In contrast, economic data is always backward-looking: it measures what happened last month or last year. This can cause problems because a weak economy does not necessarily mean a weak stock market, and vice versa. A good example would be South Africa in 2017; the economy did not grow much (GDP increased by1.2% annualized), but it’s the stock market was up by more than 20%!
In some sense, stock prices have always reflected uncertainties about future economic conditions because people have always had different expectations about what will happen next and acted accordingly by buying or selling shares. But the recent volatility in global markets is unusual in that it has been driven by inflation worries, Ukraine invasion by Russia and fears of a prolonged slowdown in China and other emerging markets. In other words, share prices are reacting to a potentially slowing economy but this slowdown hasn’t yet been confirmed.
Great companies can navigate an economic downturn. Staying invested in shares of great businesses or even just investing in the general stock market during an economic downturn can be rewarding because great businesses can make money in bad times. The key is finding businesses that are positioned for long-term growth and will be able to weather any storm. You should also avoid focusing on short term results as you often find yourself chasing performance (which isn’t always sustainable) or missing out on much larger gains if you aren’t invested when markets recover.
The stock market can be a great tool for wealth creation, but it is important to remember that its movements are driven by the future rather than the past. The world’s economy is not going anywhere anytime soon, and the stock market may be down in the short term, but this does not mean it will stay there forever.
Written by Warren Ingram
CFP®, Wealth Manager, public speaker and author. Host of the HonestMoney podcast. FPI South Africa Financial Planner of the Year 2011.
