Santa decided to skip the much anticipated year end “Santa Rally” in the stock market. As usual, markets rarely give what is expected. The volatility in December was unprecedented in that 21 of the 23 trading days saw the Dow Industrials move more than 100 points either up or down. Right out of the gates, the first week of January brought us the failed China circuit breaker experiment. China’s officials implemented new rules in their markets that limited declines to 5% before the markets closed for 15 minutes. Once re-opened, if prices fell another 2% to a total of 7%, markets closed for the remainder of the day. During the first two trading days their markets were open a total of 30 minutes each morning before the 7% breaker was reached. The third day, officials scrapped the plan and trading settled down. So much for trying to manage markets to try to limit losses.
The China experiment, along with another drop in oil prices, caused investors to shun stocks in amounts that produced the worst first week of trading in a new year in history. This has produced, at least from a technical viewpoint, very oversold conditions which normally produce at least a short term snap-back rally in equities. Statistics currently show that investor sentiment is at its lowest bullish level since March of 2009.
While in the short term a rally from current levels is quite probable, there is no denying that there are obstacles in the world arena that can keep markets unsettled for the near term. China’s economic slowdown and its transition from an import economy to a consumer consumption economy has greatly affected the world trade volume. Sabre rattling between Saudi Arabia and Iran only adds to the already unstable Middle East. In our country, the continuing drop in oil prices have caused energy companies to suspend drilling and pipeline construction which reduces both manufacturing orders and causes worker layoffs. The Federal Reserve’s decision to discontinue their easy money policy and stop adding cash to the economy has the potential to reduce money going into stocks.
As these various issues continue to be brought to our attention by the 24/7 cable news stations, it is important to remember that there has always been conflict and upheaval in the world. As markets are comprised of actual individual businesses, we understand that world conditions affect some businesses in a negative way and other businesses may thrive as they take advantage of the opportunities provided from those conditions. Well run businesses are able to manage the eventual ebb and flow of economies and continue to grow their business over time. Those that are not well managed eventually fail. That is how capitalism works. Obviously, the trick is to research the universe of available businesses and invest in those with strong records of management and success. Since it is impossible to be correct in picking all profitable businesses, it is good practice to select multiple businesses in different markets to help spread risk and give better opportunity for gain.
With that said, we have to look at why the average saver/investor fails to take advantage of this strategy. Research continues to come to the same conclusion: emotion. When it comes to investing, fear of losing money or fear stemming from ignorance causes many investors to abandon their long term plans and strategies. That fear is dangerous to your investments.
A recent survey by Bankrate found that 52% of Americans are not invested in the stock market, including in their retirement accounts! Most likely, fear has them waiting for the next 40% decline in the stock markets and they wait while their cash is sitting in bank accounts earning .3% annually.
When extreme fear hits the markets and things look to be falling apart, it creates incredible opportunities. Investors left the market in droves in the last few months of 2008 as the economy, real estate, and world markets looked to be dead. By the first quarter of 2009 a new bull market began and since then the Dow has risen over 160%. Fear adds substantial risk to your achieving wealth.
As of this writing, many of yesterday’s darlings in the stock market have taken a beating. Energy and related companies have declined 50-80% from their highs, commodities such as gold, silver, corn, etc. have fallen 50% or more. The Russell 2000 Index which includes small companies is down 20%. For many businesses, severe pain has already been felt. If, as discussed earlier, some of these businesses are well managed and just caught in the current economic slowdown, do they represent an opportunity to purchase them at an attractive price? Since it is impossible to know for sure, it makes sense if you are adding to your investments, to do so regularly to ensure you take advantage of the lower prices. Fear often keeps these investors from buying during these opportunistic times.
To think about what new ideas and opportunities are in the works for the future, one needs to look no further than the Consumer Electronics Show (CES) that was just held in Las Vegas. The innovative products that may come to market to make everyday lives more comfortable and productive are mind boggling. Technology continues to drive markets and continually upgrades the products and services we use today and can completely transform the way we live. Just look what technology accomplished in the exploration and retrieval of oil and natural gas in the past decade!
Markets will continue to be unpredictable as long as you have humans with emotions making buy and sell decisions. We believe hard work and research can reduce overall volatility and expose opportunities in long term efforts to build wealth. The opportunities that are coming are exciting. We plan to be a part of it.
We wish a Healthy and Happy 2016 for you and your families.
The Lesjak Planning Team