The stock market is always a study in contrasts, and that’s especially true today.

On the one hand, inflation is roaring and central banks are scrambling to raise interest rates. Businesses are pulling back from ultra-streamlined global supply chains, which seized up during the pandemic, but reshoring and diversifying will require new factories, suppliers and ways of doing business. That could mean higher expenses, which would inevitably filter through to consumers and eat into bottom lines just as companies grapple with the uncertain economic backdrop.

On the other hand, this year’s equity selloff has created opportunities — both by lowering the price tags of companies with long-term appeal and by shining a light on the potential market leaders of tomorrow. The challenge is to distinguish between businesses facing intractable obstacles and those with long-term promise that have been swept up in the broader market decline.

Two Capital Group Private Client Services portfolio managers, Greg Fuss and Cheryl Frank, share their thoughts on the economy, their approach to troubled markets and how they try to capitalize on volatility.

Be prepared for dislocations

There’s no shortage of economic challenges at the moment. The list includes the end of easy money, extremely low interest rates and very low inflation; anti-globalization impulses; and confrontational geopolitics. I doubt that every one of these risks will upset the market. But I think the weight of these collective challenges will increase asset price volatility.

I’ve taken steps to try to shield the portfolios I manage from risks. Prior to the Ukrainian invasion, I reduced exposure to European financials and utilities because of Russia’s movements on the border. I was worried about the potentially damaging economic and energy-related effects of an armed conflict. Separately, I’ve significantly cut exposure to travel-related companies. I worry that an economic slowdown could dent the current travel boom. Cruise lines, airlines and hotels have tended to not do well in recessions.

I would be happy to be wrong in my expectation of continued market volatility — but also excited to be right. Why excited? Because troubled markets create dislocations that depress the share prices of good businesses alongside those of weaker ones. These dislocations present the chance to invest in promising companies at compelling prices. While volatile periods can be stress-inducing, they also present opportunities to add value to client portfolios.

The companies I’ve recently added to the portfolios I manage extend across a number of industries, but they tend to share key characteristics. The first is that these are very good companies whose stock prices have declined. In some cases, Capital Group analysts had long recommended these companies, and I kept an eye on them, but I held off buying earlier because I did not want to overpay. One of the lessons I have learned is that, with patience and attention, you often get a chance to buy companies you covet but that had previously been too expensive.

Learn to love the long term, but stay ready for a wide variety of situations

I look for investments that I could hold 20 years. In fact, I would like every investment to be one I want to hold for 20 years. My approach has been informed by two factors: first, by decades of watching veteran Capital Group portfolio managers who stuck with strong companies whose shares suffered during periodic selloffs but rose powerfully as conditions improved. Beyond that is personal experience: My mother was able to achieve financial independence thanks in no small part to a few shares of IBM stock she received as a child that became quite valuable over the years.

I love to think about which companies could replicate the type of compounding that the computer giant once enjoyed. I ask our analysts for recommendations on which businesses could be held for 20 years regardless of their current valuation. Their answers make me confident that there are many great investments out there waiting to be discovered.

Obviously, a 20-year horizon is a high bar. Not every good investment will be the kind of long-term compounder that I favor. My approach is to look for companies with good balance sheets, proven management and resilience to downturns. Additionally, I avoid frequent trading and look to add to high-conviction equities when prices are depressed — as they have been in this year’s down market.

Of course, the last two years have underscored the importance of paying heed to the macroeconomic situation. A good collection of companies isn’t always enough in a portfolio — many beautiful pebbles do not make a road. My sense is that the U.S. economy is going to contract over the next year, based on the Federal Reserve’s tightening of interest rates, and that the odds of a “soft landing” are low.

That’s why I’m investing in a diverse set of securities the way an all-weather hiker might prepare for a trip. Carrying a wide diversity of tools might slow you down slightly, but it can help you make it to the end of the trail.

Thus, I don’t favor money-losing companies that rely on a single product or operate in highly competitive markets. I have been drawn to growth companies whose share prices have declined but that remain profitable with advantageous competitive positions. I think health care is very attractive, including select pharmaceutical and biotech companies. In general, the nature of the business means that many health companies have safe yields and a certain degree of insulation from economic downturns.