Take a Deep Breath
With a bumpy 2015 behind us and the stock market off to a rough start in 2016, it is perhaps time to take a deep breath. We are in the midst of increased volatility (fluctuation of market prices) due to uncertainty. Although this could cause a feeling of uneasiness, it is important understand that this is a normal part of investing and one of the reasons to be in a well-diversified portfolio.
Volatility should be expected, but we are now experiencing an increase due to uncertainty which will likely continue through the first quarter of 2016. However, we believe that the economy is still growing so the underlying data suggests a moderate growth year for the market.
Why the Uncertainty
So what is causing the uncertainty? Incidentally, any time there is an increase in uncertainty, the stock market will usually be more volatile because of emotional worries. Right now there are several concerns such as geo- political fears, Chinese slowdown of economic growth, and US energy decline under pressure from lower crude oil prices. Throw in the fact that this is a Presidential election year and the Fed has started raising interest rates, there is plenty of uncertainty.
“Volatility should be expected, but we are now experiencing an increase due to uncertainty which will likely continue through the first quarter of 2016.“
Let’s take a closer look at some of the main concerns. China is currently going through a slowdown, driven by weaker manufacturing and currency devaluation. This is happening as they are transitioning to a more service-oriented economy. Low oil prices have forced energy companies to cut expenditures including dividends and capital projects as they begin to slow production. Lastly, the Fed raised interest rates by a quarter percent in December. Given the uncertainty, the Fed may be cautious of when to continue the increase which may be beneficial.
Even with these concerns, there are positives. The US economy, Developed Markets, and Global GDP is expected to have 2.2%, 2.0%, and 3.5% growth in 20161. Unemployment is low at 5%2 and the jobs reports have been positive with steady hiring which should continue throughout the year. One of the benefits of low oil prices, is lower gas prices at the pump, which consumers have used to pay down debt or save. Despite that, bank loans have increased so there are signs for increased consumer spending. Companies in 2015 had a record high in merger and acquisition activity ($4.7 trillion worth3) which usually is a positive for shareholders.
Take the Long-term View
At any point in time, one could find positives and negatives in particular with the media. Are we in a correction or even worse the beginning of another recession? The truth is that no one knows with certainty and it is near impossible to predict the short term. On the other hand, when one takes the long view, you may feel better.
Consider the following facts. Since 1970, when the market was flat (between -2% and +2%) like in 2015, the S&P returned between 11-34% the next year3. Corrections are described as market declines of -10%. There have been 24 corrections in the last 70 years, each of them rallied to finish above the previous record high4 . A bear market is a decline of at least -20%. Since 1945, there have been 11 cases (1 every 6.4 years). The average tumble was -34% and lasted 16 months. Subsequent to each of these, the market rallied to all-time highs with the average recovery of 24 months.
Even with this information, please remember that you are likely to be in a diversified portfolio that includes bonds to help reduce the market risk. If the above facts and current volatility are still causing you nervousness, then perhaps it is time to re-evaluate your risk tolerance so that you are in the appropriate portfolio given your circumstances.
Stay the Course
With investing, there are always risks for short term market moves which is why as discussed above that one should be invested in the appropriate portfolio for their risk tolerance. Furthermore, a long term view is recommended so that one can fully participate in the market and because we don’t know with certainty which days will be good or bad. It makes it more difficult when volatility is elevated as it is now. Therefore, please take a deep breath and stay the course with your investment plan.
Disclosure
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by McMahon Financial Advisors, LLC), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from McMahon Financial Advisors, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. McMahon Financial Advisors, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the McMahon Financial Advisors, LLC’s current written disclosure statement discussing our advisory services and fees is available upon request. If you are a McMahon Financial Advisors, LLC client, please remember to contact McMahon Financial Advisors, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services.
Source: 1 Goldman Sachs, 2 Bureau of Labor, 3 Schwab Center for Financial Research, 4 MFS Disclosures: Views are of 1/18/2016, and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Neither asset allocation nor diversification assure a profit or protect against a loss. The data provided is for illustrative purposes only and is not representative of performance of any particular investment. Past performance is no guarantee of future results. The information contained herein has been obtained from sources believed to be reliable but the accuracy of the information cannot be guaranteed.