Investors wondering where to focus in an unpredictable market should explore companies' ability to sustain earnings long term, Creative Planning President and CEO Peter Mallouk suggested Monday.
"The number one thing to look at is durability of earnings," the financial planner told ThinkAdvisor. "Is what you're buying really going to bring a considerable amount of money to you?"
Consider whether the company and the sector can get through a severe downturn, he said. While the economy may not tumble steeply this year, the war in Ukraine continues and interest rates are high and likely going higher, which mean more volatility and pressure, Mallouk noted.
"The cost of borrowing's going to get more expensive; we know what that tends to do to companies that have little earnings," he said. "Make sure you own quality," because speculative companies with little to no earnings "got crushed before and likely will get crushed again," Mallouk added.
Overall, this is a market to stay invested in, according to Mallouk, who cited a positive business outlook.
Asset classes that are betting too much on the future without current or near-term expected earnings will fare worse, he said. It almost doesn't matter whether a company generates dividends; "you just want companies that are self-reliant" and don't require debt to move ahead or propel their stock prices, he added.
Overland Park, Kansas-based Creative Planning is following its own advice and staying the course, going for companies with stronger earnings across portfolios, Mallouk said. The firm avoids high-yield bonds, focusing instead on short- to intermediate-term quality.
Creative Planning stays away from companies without earnings and highly speculative areas like cryptocurrency, nonfungible tokens, small-cap growth stocks — especially in the tech sector — and Chinese stocks, Mallouk said.
The Unexpected
Mallouk's biggest market concern for 2023 is "if something new enters the picture," as the Sept. 11 attacks and the COVID-19 pandemic did.
The current economic situation is management, with the Federal Reserve raising rates but likely to stop at some point this year, and people worried about whether the economy will achieve a soft landing, he said.
"If you have some new factor that's negative come into the picture," like a cyberattack or an expanded Ukraine war, "things could get much, much worse," he said. The macro environment could go the other way with positive results, though, Mallouk added. "Peace could break out in Ukraine."
Mallouk touched on a tweet he sent earlier in the day in which he noted investors pulled $326 billion in March 2020 when the pandemic forced businesses to shut down, but that by August 2021, the S&P 500 had climbed 100% from its March 23, 2020, low, the fastest doubling since World War II.
