If your New Year’s resolution was to completely unplug from any stock market news and only check the value of the S&P 500 or Dow Jones at the end of March, you may have thought to yourself, “Meh, that was a pretty uneventful quarter.” Boy, would you have been wrong!
The first quarter of 2016 was a tale of two polar opposites. The first half got off to a wild ride almost straight down, as angst over a slowing Chinese economy, falling oil prices, and the uncertainty around the Federal Reserve’s next interest rate move drove the S&P 500 down 11% during the first six weeks of the year. The second half of the quarter, however, saw a huge turn around. The S&P 500 rebounded 13% off of its lows to finish the first quarter in positive territory, posting a gain of 0.77%. Not many would have dared to predict that, seeing how pervasively doom and gloom ruled the media during the quarter.
What changed? Why the sudden and violent turnaround? It’s tough to decipher exactly what the catalyst was for the snap back rally. It isn’t as though we all of a sudden received wildly positive economic news here in the US or around the globe; it more likely has to do with the news becoming a little less negative. Stocks don’t often recover after the clouds part and the sun comes out. Recoveries often happens well before that, frequently while the storm is still raging.
The stock market here in the US wasn’t the only one to suffer through a rough start to the year. Markets across the globe experienced a similar bumpy road. European stocks lost over 3%, while Asian markets down over 6% for the quarter. One lone bright spot, internationally, was emerging market stocks. This is an area of the market that has struggled mightily over the past 5 years, especially compared to US stocks. Lo and behold, emerging market stocks ended up gaining 5.7% for the quarter.
Bonds, as they are expected to do during times of heightening anxiety and heightened stock market volatility, provided a nice buffer to the wild swings in stocks. Bonds delivered nearly a 2% return through the first three months of the year. Gold was another standout; it was up 16% for the quarter–the best quarter in nearly 30 years!
The easy call at the beginning of the year would have been to bail out when the markets were declining and sit out the widely-predicted start of a painful, protracted drop in the market. Some analysts were talking openly about another 2008-2009 cataclysmic fall in share prices (of course they were). One analyst famously created a big stir and put his name into the Hall of Fame of Worst Recommendations Ever by telling investors to, “sell everything.” If you want to see, with the benefit of 20/20 hindsight, just how ridiculous and worthless these pundits’ predictions are, all you need to do is Google, “January 2016 Stock Market Predictions.” Just about every prediction is warning of the worst kind of market slaughter for the poor suckers who own stocks. Of course, we now know the only suckers were those unfortunates who listened to them!
Truthfully though, it was nearly impossible to find any positive stock market news during the first month of the year, yet counter-intuitively, experience has taught us time and again that those times tend to be best time to invest for long term investors.
There is an opportunity to learn invaluable investing lessons from quarters like the one we just had; lessons that will hopefully help us through the next downturn, and there WILL of course be a next downturn. Going back to the beginning of 2011, investors have been repeatedly overwhelmed with media gloom. Those who did not succumb to those fears and abandon their long term plan were rewarded. Here is a short list of the so-called cataclysmic events, and the corresponding decline in the S&P 500:
- 2011: Debt ceiling debate; US debt downgrade (-19% correction)
- 2012: Arab Spring; Concern over Greece exiting the Eurozone (-11% correction)
- 2013: Federal Reserve announces a pullback in the easy monetary policy (-7% correction)
- 2014: Ebola Outbreak (-8% correction)
- 2015: China slowdown concerns (-13% correction)
- 2016: China; falling oil prices; uncertainty around the Fed’s next move (-11% correction)
As we have counseled many times, market corrections and turbulence are simply a normal part of the market’s expected performance. In spite of all these scary occurrences, the S&P 500 has gained over 60% since the beginning of 2011. Investors who were spooked at the first sight of a declining market almost certainly missed out on much of those gains.
Where do markets go from here? There are a few things that will likely grab headlines and investors’ attention over the coming months. We are now entering into the thick of the U.S. presidential election season. Investors often fret over the prospects of one candidate being elected over another and what impact that will have on the markets. We will let you in on a little secret: it really doesn’t matter who gets elected. The Commander in Chief simply does not have the kind of power many people imagine he or she has over the economy. The stock market has risen and fallen under both parties. There is no correlation between which party is in office, and the direction of the stock market.
Hand-wringing over when the Federal Reserve will resume raising interest rates, the slowing Chinese economy, wild swings in oil prices, and other global concerns are likely to remain issues as we move forward. It is important to remember that these events, while they may certainly influence the stock markets for a short while, have very little impact on long term investment returns. In the long run, what really matters is, ‘are these events going to materially affect the value of the companies we invest in?’ The short answer is ‘no’. And yes, even if Bernie Sanders becomes president, the markets will still survive and prosper. Look no further than Scandinavian stock markets if you want to see what the future might look like for us here in the U.S. under a Democratic Socialist administration.
While it is impossible to predict the future and know for certain how the rest of the year will play out, we do have decades of market history to use as a guide. Research shows that in the years where the stock market declined in January, the remaining 11 months have been positive 60% of the time. We will see how the rest of this year unfolds, but there are plenty of reasons to be optimistic.
What we hope you take away from all of this is that a lot can happen in a short period of time. The best way to deal with an ever changing investment landscape is to remain disciplined, stick with your plan, and view the periodic market drawdowns as opportunities to take advantage of, rather than threats to run from. That’s how we approach it and, like clockwork, it paid off once again as we added to your small cap and emerging markets stock holdings during the worst of the recent market selloff. But that’s what you pay us for!