As I write this commentary, most of the popular stock market averages are on the verge of reaching their all-time highs. The Dow Jones Industrial Average hit an all-time high of 18,300 back in May 2015. The S & P 500 Index hit its high in the same month. My how the sentiment changes so quickly!
It has been quite a reversal since the beginning of the year when investors thought our economy was headed toward recession, driven by weak economic data and global strife coming out of China. Some of those concerns were overdone in my opinion, which are shared by our investment team here at Bloom. However, the market can surprise in the shorter run, and its move downward in January and February, while difficult to swallow, was not entirely surprising given the constant doom and gloom headlines.
The description below illustrates the roller coast ride global markets have been on since January 1. It is difficult to draw any conclusions after reviewing this chart other than to note, if investors made any wholesale changes to their portfolio by selling out of stocks and/or stock mutual funds, then they probably locked in losses and missed the quick recovery.
The chart above shows that stock markets across the globe, including emerging markets, rallied strongly in March, continuing a rebound that began precisely on February 12. In the U.S. and emerging markets, the rebound wiped out the deep losses from the first six weeks of the year to deliver positive returns. As is often the case, there was no single obvious catalyst for the turnaround that began in mid-February other than speculation in the news the major oil producers might be ready to cooperate to cut oil production. Who knows if that might have been the spark to turn sentiment around. The dramatic drop and dramatic recovery in such a short time was unusual. Let’s thank oil prices and the Fed’s recent comments about keeping interest rates steady for their positive influence!
So as markets seemingly push higher (at least for now!) and investors regaining some measure of confidence, how should investors be positioned going forward? The answer to this question should relate to individual goals and objectives, and should never be based on market sentiment. Investor behavior during periods of high volatility can be destructive when the market goes up and down. If your investment time horizon is well beyond 10 years, then it certainly makes sense to have exposure to growth assets like stocks. There is a tendency for investors to think that once the market reaches its all-time highs that it is time to reduce exposure to stocks because the market can’t possibly go higher.
The market is a reflection of the economy and corporate profits, and if both are stable to growing, then markets can continue climbing higher despite apparent headwinds like valuations, oil, and other geopolitical events. The best way to counteract a market at all-time highs is to own asset classes such as foreign and emerging market stocks that are not as correlated to U.S. stock markets. Some of these asset classes haven’t gone up as much as stocks in our markets, and thus offer attractive opportunities. However, this means you will be investing in areas that have currently suffered from negative headlines and recent poor returns. While that may seem counterintuitive, it is what diversification is all about—owning things that are “counter” to other investments to help maintain a balanced portfolio that can weather the market volatility to and keep you on the path to meeting your financial goals. So whether the market reaches an all-time high or drops faster than a sinking fastball, it may be tough not to make any drastic changes in your portfolio. But history shows that what goes up comes down and vice versa when it comes to the stock market. It also shows that in the long run, diversification is the key to surviving and thriving in this on-going volatility.
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Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.
