2016 in Review - A Wild Ride

2016 Was A Wild Ride

The 2016 domestic large cap market had the worst start to a year in recorded history with the S&P 500 index falling 5% in January of 2016.  Many “market experts” prognosticated that this spelled doom and gloom for the future as they breathlessly debated on television and in the print media whether an economic recession was beginning. Those who reacted to these prognostications of doom and gloom by selling and getting out of the market would soon find out that emotionally reacting to such “market news” can be a very costly approach to investing. The patient investors were rewarded when, as it often does, the market surprised the pundits with an astonishing comeback, as we saw a 6.6% bounce in the S&P 500 index in March of 2016 alone.

Then, as summer progressed, news broke out that Great Britain was leaving the European Union.  Once again, some “market experts” predicted calamity for the global markets and possible global recession. As is often the case after the media reports such news, after news of the Brexit broke the markets retreated for a period of time.  However, within weeks the S&P 500 index and the broader global markets not only rebounded, but were testing new highs.

Later in the fall, as the U.S. Presidential election campaign progressed, the “market experts” were back at it, attempting to “read the tea leaves” by providing their opinion as to how the markets would react to either a President Trump or a President Clinton.  At the time, many pundits claimed that the market had “priced in” a Clinton victory and could decline in the event of a surprise Trump win.  Within the early hours of trading after the Trump election win, the markets did indeed pull back a bit.  However, as we all saw, this dip was merely a lull before the domestic U.S. large and small cap markets roared to a fantastic finish to end 2016, with the S&P 500 returning a robust 5.3% post-election.  This all illustrates that no matter what the market experts and pundits are saying, nobody can predict with any sort of consistent accuracy what the markets will or won’t do.

The following chart provides a snapshot of the year-end total return of a variety of the major domestic and international asset class indices for the 2016 calendar year.

We are currently in the midst of the 2^nd longest bull market run in the U.S. large cap markets since 1928, which is currently approaching 8 years.  Given such a strong and lengthy run, we’re now predictably hearing the market pundits discuss the likelihood of a market correction (defined as a 10% decrease in aggregate market value), or at least a pause in market growth.  Such corrections after lengthy market runs are normal occurrences in the markets (and are arguably healthy), and one may happen soon or it may not.  Nobody knows for sure.  The pundits opining that such a market correction is imminent often cite various historical data averages with respect to the aggregate Price to Earnings ratio of the companies comprising the S&P 500 index, arguing that current P/E levels are higher than historical averages.  However, just as convincing is the contrary data that shows that the S&P 500’s most recent returns are lower for almost all time periods shown in the chart below.

As seen above, the current run in the S&P 500 index is neither extreme nor unprecedented. In fact, many S&P 500 companies have been raising their dividend payouts of late, which is typically an indicator that they are confident in their company’s ability to meet its performance targets.   Moreover, looking at economic data, payrolls are currently expanding, the housing markets are currently steady, and wages are currently rising.  These factors and other economic data suggest that recessionary danger is not imminent and are factors that “market experts” with continued bullish sentiment cite when supporting their position.  So whether a correction is imminent or the markets will continue to grow in the near term, nobody can know for sure.  Our larger point is that whether a correction is imminent or not is irrelevant to good, sound investing.

We continue to find empirical evidence supporting our philosophy that proper asset allocation, utilizing a well-diversified portfolio of indexed equities and fixed income securities commensurate with an investor’s risk tolerance, is the primary driver of investment returns.  In adhering to this philosophy, it is imperative that clients ignore all the “market noise” coming from pundits on television or the print media that have a vested financial interest in driving ratings and readership by fomenting emotion.  The wise course for investors is to have a long-term outlook, realizing that it is not possible to “time the market.”  Instead, discipline is required to adhere to the investor’s well-conceived asset allocation plan, re-balancing at least twice per year (thus engaging in the wise practice of selling those asset classes that have out-performed and buying those asset classes that have under-performed…i.e. “buy low and sell high”).

 To illustrate our point of staying invested regardless of market noise and not trying to “time the market,” we leave you with one excellent example.  We often hear “market experts” talk of “waiting for a pullback” in the markets before buying in.  The following illustrates the danger of such an approach.  In a recent study conducted by the Bespoke Investment Group, they analyzed two hypothetical portfolios.  In one account, for the period 1955 to the present, the investor simply contributed $100 per month to his account at the beginning of each month, regardless of market circumstances.  Moreover, he simply stayed invested in an S&P 500 index fund the entire time, never making any withdrawals.  Such an investor would have over $5 million in his account today.  In the second account, the investor set aside $100 per month but only invested the accrued money into the S&P 500 index fund during times when the S&P 500 index was down at least 3% month over month.  The second investor also stayed invested in the S&P 500 index fund in his account the entire time, never making any withdrawals.  The second investor would have approximately $1.16 million in his account.  While this is still a nice amount, it is less than 25% of what he would have had if he had simply invested immediately, without attempting to time the market.