Surprise! The Stock Market is Positive
You wouldn’t know it from the amount of pessimism in the news and political discourse, but the stock market is now positive for 2016. As of Friday, April 15th, the S&P 500 has recovered fully from its much-publicized January drop to record a much less publicized recovery, rising over 13% from its February low to a 2.4% increase for the year. True, 2.4% is a modest gain, but after January 2016 was touted as ‘the worst start in the stock market ever’ I find many of my clients asking ‘how much is the market down this year’ and they are surprised to learn that the stocks in their portfolio are actually positive for 2016.
There is an overall perception that the stock market is incredibly risky at this point and something to be avoided. Part of that perspective comes from the two sharp corrections that we have had over the past year. Both drops were scary with steep declines of over 10%. To make matters worse, the S&P 500 is still down from its February 2015 high resulting in little to no gains for all of that stress. Overall it is has been a pretty rough past 12 months. And yet, the volatility that we have seen over the past 12 months is actually quite normal from a historical perspective, and history teaches us that the stock market can continue to climb in spite of volatility. Consider the following statistic by JP Morgan: The average intra-year drop in the stock market for the years 1980-2015 was 14.2%. However, intra-year drops rarely led to yearly losses with 27 out of 36 years ultimately ending in positive territory.
I’m not suggesting that 2016 is going to be a great year for stocks, but I am suggesting that sentiment is a terrible predictor of what the stock market will do and that in the long run, it pays to stay invested in stocks. What many forget is that there are also risks from being out of the market. For example, if you decided to ‘protect yourself’ by selling in February you just lost out on a 13% gain. If you are feeling good about being out of the market for 2016 you’ve just lost out on a 2.4% gain. These types of mistakes are easy to forgive since they are lost ‘gains’ and simply erode your investment returns, not your account balance. Yet, over time mistakes add up and lower returns put your financial plans at risk. For example, following the crisis of 2008 many ordinary investors failed to profit from the recovery for years because they felt the market was too scary. Many still have not fully recovered simply because they refused to step into the market. Yet, the stock market is well above its 2007 pre-recession high and the S&P 500 has had an average annual return of over 15% since 2008. It is hard to make up for being out of the market when large gains are made.
Despite the persistent negative news in today’s environment, there is actually good news that shows the US economy is still growing. For example, the labor participation rate is increasing for the first time in years, the US consumer remains strong and is spending, real disposable income is growing faster than it was pre-recession, retail sales are growing at 5.4%, inflation is low, and individual and corporate debt levels are low. Of course, there are risks, but there are always risks. When you read the news and hear all of the pessimism in the market, consider your investment strategy. We develop plans for our clients that carefully consider how much exposure each individual should have to the stock market. We acknowledge that the world is a scary place and consider how to protect our clients through appropriate diversification rather than trying to be in or out of the market. We look for value in the stock market to buy those assets with the best fundamentals. We believe that this type of analysis and discipline is far better than listening to the news and following the herd. Ultimately, we believe that this is the path to better returns.