The markets got off to a negative start this year. For the month of January, the S&P 500 was down 5 percent and the DOW Jones Industrial Average was down 5.5 percent. At their lowest points, the indexes were down 9.5 and 9 percent, respectively. (1)
Between the volatility and the overly-emotional coverage in the media, you might not be sure whether to panic, stay the course, buy, or sell it all. Some days, it might seem like it should be all of the above!
A lot of people have been asking me if this is another 2008 all over again. I often tell my clients that for the generation that went through the market crash in 1929, every market pull-back after that felt like it could be another one. The same goes for the generation that experienced Black Monday in 1987. Now, here we are as the generation of 2008 — it’s natural to have that experience in the back of your mind.
But it’s important to remember that it doesn’t necessarily mean we’re in for a repeat.
If you’re worried and wondering what’s going to happen next, or whether we are in fact in another 2008, it’s important to take a step back and look at the big picture. That picture can be hard to see — like I always tell my clients, if you put 10 analysts in a room you’ll get 20 different opinions — and even with help from my crystal ball article, you’ll find out that it’s impossible to know where the market will go next.
But with all the lack of clarity about what’s happening, this situation might be an emotional situation as much as an economic one.
To help you get a better view of what’s going on, I want to introduce a couple of the major factors at work in the markets and in everyone’s psychology. Here’s what you need to know and what you can do to make the most of this volatile situation.
There is a lot of back and forth about where we stand economically.
Even though interest rates finally went up on the Federal Reserve’s view that the economy is moving in the right direction, and even though unemployment is down (a good sign), some analysts are worried. The participation rate in the labor market is the lowest its ever been, which means fewer people are looking for jobs (which is a bad sign). Employment indicators is just one of many economic benchmarks being debated, and they illustrate some of the disagreement about where the US economy stands. (2)
To top it off, China’s economy is slowing and there’s a chance that growth worldwide will be weaker in 2016. Some analysts worry that the slowdown in China will filter back to the US. China’s economy won’t affect us directly: American exports to China are insignificant, representing about 7% of total exports and amounting to less than 1% of our Gross Domestic Product. But China’s growth is tied to growth around the world, which could affect us over time. The degree to which this is possible is part of another ongoing debate. (3)
Oil is another part of the story. Oil prices are lower than they’ve been in 12 years after falling 75 percent in under 2 years. That’s the kind of volatility that can make anyone nervous. (4)
However, there’s a tug of war between analysts as to what’s causing low oil prices and what the effect will be on consumers and the broader economy. Low demand for oil could signal slow growth and the possibility of a recession. (5)
On the other hand, if lower prices at the gas pump are caused by an oversupply of oil, it’s generally favorable because consumers and businesses have more money to spend elsewhere (without the recession component). Alan Blinder, a former Vice-Chairman of the Federal Reserve, thinks that the markets are scaring themselves when it comes to oil. Time will tell, but the back and forth over the issue is why you’re seeing so much volatility.
It all depends on what new data point comes out or which side is dominating at a particular moment. That’s the main problem: these discussions themselves are volatile, and right now they’re taking place at a high volume. A volatile market and a bit of hysteria can turn into a vicious cycle!
Sometimes it can take a while before more level heads prevail. I always tell my clients that when you’re in the moment these kinds of issues can seem much more magnified — both in times of fear and in times of greed — but when you move out a year, 2 years, or 5 years, these kinds of markets starts to look like just another blip on the radar.
The FANG stocks
It’s also important to keep in mind that just four stocks — Facebook, Amazon, Netflix, and Google — contributed the most to the S&P 500’s growth in 2015. While the S&P 500 returned just over 1 percent last year, together the FANGs returned a huge 67 percent. (6)
If the FANG results are removed from the index, the S&P 500 would have lost 3 percent in 2015. (7)
The valuations around these stocks could help the market out this year or they could contribute to slower growth. Again, there’s a lot of discussion about whether the FANGs are overvalued or whether they’re valued appropriately for their earnings growth and potential. Again, it’s a matter of analysis and perspective.
Big picture, the key to the issue is that the stocks that made an index look good can also make it look bad. It’s important to take a step back and see short term volatility for what it really is: short term, and often driven by emotion.
Whether we like it or not, behavior affects market performance, and it’s easy for the emotions of investors and traders to push the market higher or lower than its “real” value in the short term. When it comes to my view on the market, my glass is half-full — with some spillage from time to time. I think the long-term data support that view, but even still, there will be downturns.
It can be hard to stay steady with all the commotion in the media, but when it comes to the news, remember: if it bleeds, it leads, and emotional markets make for emotional market news.
Everyone is trying to jockey why exactly the market is down and where it’s going, but at the end of the day — despite what all the pundits on TV would have you believe — we’re just not sure. Because no one knows what’s going to happen next, it’s very important that you understand your individual risk tolerance, your objectives, time horizon, and the necessity of a well-diversified portfolio.
As I tell my clients, markets like these are actually where I feel more comfortable investing. These are the moments when I like to wear the hat of a contrarian: as Warren Buffet said, “Be greedy when others are fearful, and fearful when others are greedy.” It’s easy to buy into a complacent or rising market when everyone thinks the good times will last forever. It’s a lot harder to buy when everyone is panicking — but that’s exactly when you’re also more likely to buy at a better price. It sounds ridiculous, of course, but being a contrarian can be hard to execute in practice. (8)
That being said, I’ll be the first to tell you that there isn’t a bell that signals the bottom of the market. Generally speaking, I find it’s easier to pinpoint the bottom of the market after it’s happened (kidding, excuse my dry sense of humor). That’s why I recommend discipline and standing by your asset allocation strategy.
In my 24 years in the business, I’ve learned that tough markets are a great time to keep investing when you have a long-term time horizon. In times like these, I stick with building the kind of well-diversified, strategic portfolios that have weathered a number of ups and downs in the markets. That’s what I’ll continue to do going forward.
I know it seems like these volatile periods can go on forever, but remember: the market climbs a wall of worry. Today it’s China, terrorism, geopolitics, a strong dollar, and interest rates. Tomorrow it’ll be something else. Rather than worry about it or continuing to turn a blind eye to a neglected portfolio, I recommend establishing a well-diversified portfolio and putting yourself in a position to build long-term gains.
Written by Bradford Pine with Anna B. Wroblewska
To learn about retirement savings, download my free eBook, “10 Tips You Need to Know About Your IRA Rollover.” This short book is packed with critical information that will help you make the right decisions about your retirement savings.
(1) Google Finance.
(2) New York Times.
(3) Wells Fargo.
(5) The Guardian.
(6) Schafer Cullen.
(7) Schafer Cullen.
(8) New York Times.
Written by Bradford Pine
Bradford Pine Wealth Group – New York City Financial Advisors
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