Contributed by: Melissa Joy, CFP®
After a year where the market couldn’t pick a direction, global stocks are broadly down through the first three weeks of the new year. Experts agree that the causation is complex. Here are some factors that are contributing to this trend:
- China: Economists have long predicted slowing growth in China. The rate of stagnation accompanied by particularly poor showing for Chinese stocks has had a ripple effect throughout the world even though most US investors have little or no direct investment in the Chinese stock market.
- The price of oil: Oil was trading near $100 a barrel 18 months ago. It has declined more than 70% to below $30 a barrel. While this may be a blessing at the pump, it was unexpected by forecasters and the finance world.
- Interest rate rise: The Federal Reserve increased interest rates by 0.25% in December. History shows us that the first time rates rise, markets typically declines.
It is normal for you to feel anxious when markets go down. Changes from day to day reflect uncertainty which is something that is naturally difficult to process and understand. You may find it useful to learn about other similar situations so you have a framework to understand what may be coming.
What we know about history and market fluctuations.
- The counterintuitive relationship between investor emotions and market opportunities. Beware because extraordinary investment opportunities may be wearing a disguise that feels like doom and gloom. We have entered a period of depressed investor emotions – risk off, glass half empty, is the sky falling? With growing unison to these downbeat voices, contrarians look for capitulations where many investors do the wrong thing by selling out, giving the contrarian thinker the opportunity to buy low. Things aren’t typically as bad (in this case) or as good (in the case of market tops) as they appear and keeping reactions more even rather than extreme can help your long-term results.
- Historically, interest rate hikes tend to make stock returns worse first and then better later. Since 1980, the first rate hike after previous decreases resulted in lower stock returns for the first few months. But over a bit more time – 12 months, average returns were higher by 5% [Source: Raymond James, S&P500]. The timing of today’s market declines fits with this trend. Fidelity went back further and found that between 1950 and 2010, the average return of stock markets as measured by the S&P 500 2 years after the start of a rising rate cycle was more than 15%.
- Time is your friend. While frustrating, short-term time periods can often have big downs as well as big ups. Don’t let alarmist short-term headlines change your perspective about the value of long-term investing. Over time, history tells us returns become less volatile and less likely to be negative.
What should you do now?
- Don’t get too distracted. Financial media feeds on emotions and fears during market downturns. Market woes can equate to rating bonanzas, but are not the best source of advice for investors. Turn down the volume on alarmist rants!
- Don’t ditch your process and plan. Down markets can act as sirens, crashing good investment processes into cliffs. Don’t throw your investing plan out. If your plans were soundly constructed, they should anticipate that markets will go up and down. You are an important part of your process, and your decision to stick with the plan you’ve decided upon is an important component of your potential future investing success.
- Discuss your concerns with your financial planner. While I don’t recommend taking advice from financial media, I do recommend that you discuss your concerns with your financial planner or professional. A good planner knows your personal situation and approach to risk. If you’ve got a financial plan, they can explain the impact of the current market situation to your personal needs and goals. Viewing the big investment story in the context of your own financial situation can help to provide the perspective you need to stay the course.
No one wants to live through negative investment performance, but it has always been a part of the reality of being an investor. Past performance cannot predict future returns. History tells us, though, that there is an extraordinarily high probability that this won’t be the last time that markets go down and also that we haven’t seen the last new high in terms of stock index returns.
Please let us know if anyone here at The Center can help you by discussing your personal investment portfolios.
On behalf of everyone at The Center,
Melissa Joy, CFP®
Partner, Director of Wealth Management
Melissa Joy, CFP® is Partner and Director of Investments at Center for Financial Planning, Inc. In 2013, Melissa was honored by Financial Advisor magazine in the Research All Star List for the third consecutive year. In addition to her contributions to Money Centered blogs, she writes investment updates at The Center and is regularly quoted in national media publications including The Chicago Tribune, Investment News, and Morningstar Advisor.
Financial Advisor magazine's inaugural Research All Star List is based on job function of the person evaluated, fund selections and evaluation process used, study of rejected fund examples, and evaluation of challenges faced in the job and actions taken to overcome those challenges. Evaluations are independently conducted by Financial Advisor Magazine.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Melissa Joy, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Past performance is not a guarantee of future results. Holding investments for the long term does not insure a profitable outcome. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance.