Are Corporate Profits the Key to Weathering a Stock Slide?
The data from bear markets suggests that companies’ ability to make money protects investors in turbulent markets.
A declining market should focus investors' attention on the profitability of the companies in their portfolios.
Photographer: Mary Turner/Getty Images
With the U.S. stock market off to a shaky start this year, investors can expect to hear the old saws about declining markets: Active managers beat indexes in a bear market (they don’t); value stocks are hit hardest in a market slump (wrong again); or the subject of this column, that shares of high-quality companies offer the best shelter in a turbulent market.
Quality means different things to different investors, but by most definitions a high-quality company is one that makes a lot of money reliably. Think Apple Inc., Microsoft Corp. or Johnson & Johnson. In that sense, it’s reasonable to assume that shares of high-quality companies will fare best in a bear market because fat profits often come with a strong brand, loyal customers, good management and deep pockets, all big advantages in a downturn.