-History shows it doesn’t take very long for market corrections (declines of greater than 10% but less than 20%) to reverse and return to prior peaks. The mean time to market recovery has only been 107 days. According to investment firm Deutsche Bank, on average, the stock market has a correction, defined as a drop of at least 10% or more from its recent high, every 357 days—or about once a year.
-It makes more sense to stay committed to an investment plan of diverse assets rather than try to guess the best time to be in the market. Over the past 66 years, there have been 13 bear markets, lasting an average of 14 months and declining a total of 24.6% before recovering. By contrast, the 14 bull markets since 1949 have lasted roughly a multiple of over 3x longer, or 44 months on balance, each growing an average of +117.3%.
-The equity markets ended up with sharp 2%+ increases on Friday with positive developments, including
early corporate earnings results, economic data, and supportive central banks comments, all which helped turn the receding tide. The strong Friday finish for the equity markets during the holiday-shortened week helped offset the sting of two turbulent weeks of decline; however, S&P 500, Dow and Nasdaq all remain down -6.6%, -7.5% and -8.3% year-to-date, respectively.
-Equity markets tumbled on Friday Jan 15th to end a second straight week of sharp declines. The S&P 500 Index joined other major indices in starting the tumultuous year with downward moves toward
correction territory. Investors knee-jerk reaction of “sell-first, ask-questions-later” is a sentiment that has turned excessively negative, with the S&P down -7.83% YTD and the NASDAQ down -10.36 for the year.
-Oil prices have dropped about another -20% this year and this has impacted the S&P 500 and bonds given their high exposure to energy corporates. However, higher dividend yield stock sectors that we currently overweight for equity allocation, such as utilities, are only down -0.21% for the year. Continued worries about falling crude oil prices and weakness in both China’s currency and its stock market contributed to the malaise, being down over -20% from its late December high - entering bear market territory. Nonetheless, China’s manufactory-driven economy has yet to show evidence of a “hard-landing” given the overcapacity, real estate bubble, excesses of investment and exchange rate pitfalls.
-As the year unfolds, we look beyond macroeconomic headlines and seek out bright spots across the investment landscape stand to benefit. We continue to increase allocations to strategies that benefit from negative market forces of prolonged market volatility as downward market trends persist; marked by signals of investor capitulation related to China-Oil-ISIS-Fed worries. For example, one of our liquid tradable manager strategies benefits from market weakness and volatility and returned +50% in 2008; this fund had a +16.o% annual inception return since 2006 and returned +7.74% in 2015; the liquid tradable holding is also up YTD 2016 (as of Jan 15). This asset class category of funds all have daily liquidity and are tradable within our Charles Schwab Institutional platform.
-Art Cashin recently shared a powerful data point “Jason Goepfert, the outstanding pilot of SentimenTrader dug into his incredibly extensive files to uncover a rather rare condition. He noted that the indices have had two 10% corrections in a rather short span. That has only happened three times in the last 100 years. Unfortunately, those occurrences were in 1929, 2000 and 2008. As you may recall, those were not particularly good years for the bulls.”
-Inasmuch as we have forecasted the current volatility in 2016 with higher frequency and greater magnitude, and also positioned our client portfolios for this current environment, it is important for investors to remember that there has been a lot of volatility and plenty of sharp corrections, even bear markets, over the course of the past two decades. From the peak in 2000 to its trough in 2002 the equity markets tanked by almost -50%. On October 19, 1987 (a.k.a. Black Monday), the market plummeted by more than -20%. Due to the financial crisis starting in 2008, by March 2009 the S&P was down almost -60% from its 2007 apex. And during the past 25 years the S&P 500 has fallen by more than -8% at least once over a three-week period in the large majority of calendar years. It happened even four months ago as recently as August 2015. It has happened in 2011, 2010, and several times during the most recent financial crisis about eight years ago. It has happened in 2003, multiple times in 2002, and frequently in 2001.
-Fed Rate Rise Calls Evaporate as Markets Plunge. The Fed made clear their rate guidance with "liftoff" with an anticipated four more 25 basis point increases this year. But U.S. interest rate futures markets show barely two rate hikes priced in for this year. According to former Bank of England policy maker and Economics Professor at Dartmouth (Blanchflower), “The markets don't believe the Fed. I said at the time of the December raise it was a mistake and gave a 50/50 chance that the next move would be a cut."
-The -4.93% YTD decline already for the S&P 500 is actually the worst 4-day start to a year in the index's history since 1928. The week's market upheaval is more about emerging markets than developed markets and more about global currency mechanisms than credit/debt issues. However, investors should have safeguards in place for portfolios and have adaptive investment strategies in place given the whipsaw of market sentiment. One of the reasons so many investors fail is because they make poor decisions when markets fall.
-We forecast a modest positive environment for 2016 with tepid U.S. economic growth in light of the strong U.S. dollar headwinds on exports and U.S. corporate global exposure, also weighed down by the energy industry’s dismal outlook and China’s troubles reverberating into core goods and services. More specifically, we look for the S&P 500 to return low single digits with elevated market volatility in 2016. Our investment strategies for 2016 will include more allocation exposure to benefit from both volatility and the prospects for only marginal potential equity market returns. We also foresee market corrections, periods where the equity markets recede -10%. This type of pullback has occurred as recent as the month of August 2015 and with a typical frequency of about every 18 months or so.
-Asset allocation is vitally important. The benefits of diversification can be powerful and robust, not just in terms of volatility reduction, but also for return enhancement. We recommend multi-asset diverse portfolios: when we construct an investment portfolio using multiple asset classes, one finds that portfolio volatility is less than the weighted average of the volatility levels of its components. This occurs as a result of the dissimilarity in patterns of returns among the components of the portfolio. We will call this advantageous reduction in portfolio volatility the multi-asset diversity effect.
-As one investment leader puts it (Gibson), ‘the multiple-asset class strategy is a tortoise-and-hare story. Over any one-year, three-year or (intermediate-term) period, the race will probably be led by one of the component single-asset classes. The leader will, of course, attract the attention. The tortoise never runs as fast as many of the hares around it. But it does run faster on average than the majority of its components, a fact that becomes lost due to the attention-getting pace of different lead rabbits during various legs of the race... Yet the tortoise, in the long run, leaves the pack behind. And in case the analogy was lost on anyone, the hare is the single-asset class (such as just pure) domestic stocks, for instance - whereas the multiple-asset class is the tortoise.’
-The auto investment services called Robo-Advisors like Betterment and Wealthfront apparently did not serve their investors well in 2015. Research analyst Meb Faber said all four of the Robo-Advisors "likely lost money in 2015, with Betterment losing between 0.28 percent and 3.16 percent, depending on the allocation model, and Wealthfront losing between 1.08 percent and 4.59 percent. This isn’t surprising considering most assets performed poorly in 2015, yet inexperienced investors complained on social media. “People [who] flip out about being down 5 or 10% don’t understand these portfolios have lost 30 to 50% historically!” Faber said
-S&P 500 finished the 2015 year with its first loss of -0.7% since 2008, yet still eked out a +1.38% positive overall total return with dividends. The S&P was weighed down by significant falls in the oil and materials. The Dow Jones returned +0.21% and US Corporate Bond Index finished down -0.46%. US Corporate High-Yield bonds lost -4.5%, according to the Barclays index, while Brent crude tumbled -35% over the year from $57.33 to below $37.28 a barrel; high yield bond exposure to energy was a determent. Spot gold dropped -10% with copper falling by -25%. In a year of US dollar strength the dollar index rose +9% while the euro gave way to a -10% decline, falling from $1.21 to about $1.09. The Brazilian currency (the real) stood out as the biggest decliner, down -33% against the dollar, hurt by a weakening of its commodity driven economy and political risk.
-While unemployment itself has looked good enough and there has been some wage growth, the labor force participation is at 62.5%, which is essentially its lowest mark since 1977.