Ask the Rational Investor: Good Investors Stay Ready for Pop Quizzes

A good investor is always ready for a pop quiz, and market volatility often tests that readiness for finding attractive investments. 

Quick price declines can cause investors angst, especially if their asset allocation leans too aggressively towards equities.  But seasoned investors can use the stock market’s volatility to invest in companies at unusually attractive valuations.

With the S&P 500 down nearly 10%, and the Nasdaq down almost 18% for the year so far, investors might be wondering how much lower stocks might go?  In the early phases of the sell-off companies with very little profit were the first to decline; now, many high-quality companies are starting to look attractive.

Investor sentiment, measured by several different indicators, also signals a stock market that is oversold.

Several months ago, many economists argued that inflation would be transitory, or short-term.  Clearly high inflation rates of late have put this argument to bed, but economists still anticipant intermediate inflation to be moderate.

One change that has occurred is that core, nondurable goods, and services inflation is trending close to 4%, a level not seen since 2005.  Durable good inflation has been elevated since early 2021 and is now close to 12%.  Economists don’t typically worry about durable goods inflation because it can change quickly, as these are products bought and sold frequently. Still, sometimes, services and nondurable goods inflation can be sticky.

Many of these price increases are supply-driven, causing concern.  Supply chain disruptions will eventually resolve themselves, but accelerating deglobalization trends will also prove inflationary.

Investors looking for bargains should carefully weigh an uncertain geopolitical and inflationary environment.  If your equities segment is underweight, it may be prudent to start nibbling at high-quality companies that consistently demonstrate purchasing power, with strong balance sheets and dividends.

Sources: Company reports

Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms.  The company serves high-net-worth individuals, families, and non-profits, and has been ranked as one of the largest money managers in Northeast Ohio.