The U.S. economy is growing at a pace not seen in the last decade, yet the stock market is caught in a web of uncertainty that has little chance of clearing up in the months ahead. This is primarily thanks to geopolitical tensions, sliding oil prices, sluggish European and Japanese growth, weakness in key emerging markets and rising interest rate concerns.
Additionally, the currency war has escalated, with many countries choosing loose monetary policies to stimulate growth and prevent deflationary pressures. This is in contrast to the U.S. Fed policy of tightening the stimulus program by wrapping up QE3. The diverging central bank policies have propelled the U.S. dollar against the basket of various currencies to multi-year highs.
Further, both the World Bank and International Monetary Fund (IMF) recently cut their growth forecast for the next two years, spreading jitters among investors. The World Bank projects the global economy to expand 3% this year and 3.3% in the next, down from 3.4% and 3.5%, respectively.
On the other hand, IMF lowered its global growth outlook to 3.5% from 3.8% for 2015, representing the sharpest cut in three years. Growth for 2016 is forecast at 3.7% versus the previous projection of 4%.
Amid these uncertainties, quality investing seems a prudent choice. This is because quality stocks are generally rich on value characteristics and focus on high quality scores based on three fundamentals factors – high return on equity, stable or rising year-over-year earnings growth and low leverage. This approach seeks safety and protection against volatility in turbulent times.
Academic research shows that high quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term. More importantly, these stocks generally outperform in a crumbling market.