By PB Bachman
The U.S. stock market began 2016 with a rough first week. The S&P 500 and Dow Jones Industrial Average lost 6.0% and 6.2% this week, respectively. Losses in the U.S. stock indexes this week represent one of the worst starts to a year in history. This article will attempt to highlight some of the key drivers behind the market action.
The underlying theme this week was the unusual market activity in China. The Chinese stock market slid significantly lower this week and ignited concerns in the U.S. stock market about the Chinese economy. Simultaneously, the Chinese government has been enacting measures in the Chinese stock market and foreign exchange market to attempt to prop up its stock market and economy.
Another theme this week was the continued decline in the price of crude oil and other commodities. Although lower oil prices are good for many in the economy, such a persistent drop in oil prices like we have seen since mid-2014 worries investors about the outlook of global economic growth. Oil supply is as high as ever, but investors seem to be more worried about weaker demand for oil and other commodities, which may be an indicator of economic trends. In addition, geopolitical events this week caused panic in the markets, namely the news story of North Korea testing a hydrogen bomb. Of course, there are many other forces at work in the stock market beyond these stories as well.
Perhaps the most important thing for our clients to remember when listening to the financial media at times like these is that the stock market (and markets in general) are not necessarily as rational in the short run as they are the long run. Markets are composed of people, and people react upon emotions. Fear, which drives selling, is the prevalent emotion behind market sell-offs like the one we experienced this week. Even the jobs report released on Friday, January 8, which most economists considered a positive report, did not help the market end the day higher because of other overriding worries in investors’ minds at the time.
It is possible that volatility in the stock market will continue. Our firm does not know what the stock market will do next week or beyond. However, in our opinion, the long-term rewards of staying invested in the market are greater than withdrawing from the market during turbulent times like these. “Getting out” also creates the problem of when to “get back in,” and study after study shows when people finally have enough confidence to invest in the market again they have missed out on significant gains. The chart below goes back 35 years and shows the actual return on the S&P 500, and also shows how low the S&P 500 was at the lowest point in the year. While, the market was down at some point every single year, the market almost always finished well off the lows. This is a powerful chart, and we have highlighted it in the past, but I encourage you to think about it as it puts some things into perspective even more today. Remember, it’s time in the market, not timing the market.
