Markets Start Year with Something They Dislike: Uncertainty

January
19

Written by: Jon McGraw

We all have our pet peeves, and if there is one thing markets do NOT like, it is uncertainty. Unfortunately, we entered 2016 with a lot of unanswered questions:

  • How much has China’s growth slowed? How will the country’s slower growth affect companies and investments around the globe?
  • How will the Federal Reserve’s changing monetary policy affect the U.S. economy? How many times will it raise rates during 2016? Will the Fed change course?
  • Will oil prices continue to move lower? Will they move higher? How could changing oil prices affect economic growth?
  • How is the sharing economy (renting rooms in a home, offering rides for a price, sharing goods like automobiles and bikes) affecting economic growth in the United States?
  • How will demographics—particularly the changing ratio of working people to retired people—affect economic growth?
  • How will geopolitical risks affect markets during 2016?

Amidst all of this uncertainty, the words “market correction” (a drop of at least 10 percent in the value of the market) and “bear market” (a drop of 20 percent or more in the value of the market) are being bandied about frequently. According to Barron’s, the Standard & Poor’s 500 Index finished last week in correction territory. So, are we headed for a bear market? That remains to be seen.

Bear markets often are accompanied by recessions, and few experts believe a recession is likely in the United States during 2016. Historically, there have been bear markets that have occurred without a recession. These have lasted, on average, for about five months. That’s far shorter than the 20-month average length of bear markets that come in tandem with recessions.

One expert cited by Barron’s commented on the market downturn, “If there’s a silver lining, it’s that the market is a lot cheaper than it was a few months ago. The S&P 500 trades at 15.9 times 12-month forward earnings forecasts … back where valuations were at the beginning of 2014. That means there are values to be had.”

Data as of 1/15/16 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) -2.2% -8.0% -5.6% 8.5% 7.7% 3.9%
Dow Jones Global ex-U.S. -3.4 -9.3 -14.1 -4.1 -3.3 -0.7
10-year Treasury Note (Yield Only) 2.0 NA 1.8 1.8 3.4 4.3
Gold (per ounce) -0.7 3.0 -13.1 -13.3 -4.3 7.1
Bloomberg Commodity Index -4.2 -6.5 -27.8 -19.3 -14.6 -8.0
DJ Equity All REIT Total Return Index -2.7 -5.6 -8.5 7.4 10.0 6.3

Sometimes the Investing Road Is Bumpy

Investing during the past couple of years has been like driving down a rutted dirt road in a car with worn shock absorbers: fraught with jarring ups and downs. At times like these, it can be helpful to look back and realize we have weathered difficult markets in the past.

A good starting point may be August 1979 when the headline on the cover of BusinessWeek declared equities (stocks) were dead. The accompanying article explained, “The Dow Jones industrial average set its all-time high of 1051 in 1973, but since then it has sunk nearly 20 percent to its current 830.” More recently, Bloomberg discussed the circumstances that led to the article:

“At the time the story was written, the stock market had sustained serious losses and the long-term health of the U.S. economy was a significant concern. The story has aroused some controversy over the years, as the stock market staged a strong comeback in the decades that followed its publication. But few, if any, market forecasters were willing to call such a recovery at the time, and the story provides a telling look at how inflation had ravaged the market landscape—and investor psychology—at the close of the 1970s.”

Since the 1970s, we’ve weathered a few other crises of note:

  • On Black Monday, October 19, 1987, the Dow lost 22.6 percent of its value in a single day. Major U.S. indexes finished the day at about:
    • Dow: 1,739
    • Standard & Poor’s 500 Index (S&P 500): 225
    • Nasdaq: 360
  • When the dot-com bubble burst, the value of the Nasdaq Composite Index (which is sometimes considered a proxy for technology companies) bottomed on October 9, 2002. The major indexes finished the day at:
    • Dow: 7,286
    • S&P 500: 777
    • Nasdaq: 1,114
  • On June 30, 2009, the month the Great Recession ended, the major indexes closed at about:
    • Dow: 8,447
    • S&P 500: 919
    • Nasdaq: 1,835
  • Last week, after the worst start to a year on record, the major indexes finished the week at about:
    • Dow: 15,988
    • S&P 500: 1,880
    • Nasdaq: 4,488

It’s an uncomfortable fact, but stock markets can be volatile. They move up and down, although historically, market values have tended to increase over time. That’s one reason it’s important to build and maintain a well-allocated, diversified portfolio grounded in your risk tolerance and financial goals. Diversification does not ensure a profit or protect against losses, but it may help reduce the impact of market fluctuations on the value of your portfolio over time.

Weekly Fun—Think About It

“The most difficult thing is the decision to act; the rest is merely tenacity. The fears are paper tigers. You can do anything you decide to do. You can act to change and control your life; and the procedure, the process is its own reward.”

—Amelia Earhart, aviation pioneer