Picture yourself on vacation to a far away island starting on Friday, August 21st 2015 for an entire week. On this vacation you were completely off the grid, no technology whatsoever including cellphones, laptops, or anything that would allow you to keep up with the market. When you get back home you wouldn’t have noticed much change in the market aside from a slight increase of .9%. To anyone who keeps an eye on their portfolio or any news outlet knows that the market was hot-blooded that week. Although it can be tough and stressful, it’s important to stay the course in an impulsive market for the well-being of your portfolio.
Corrections are normal and are to be expected, especially when investing in equities. For each and every year since 1980, the S&P 500 return has been negative at some point during the year; however, in only 7 of those 35 years has the return been negative for the full calendar year. The most extreme of these cases was 1998 when the S&P 500 was down 19% at one time, yet still was up 27% for the full year return. Investors need to expect these rollercoaster statistics when investing in equities. Shareholders can expect on average, three 5% pullbacks per year, a 10% correction per year, and a 20% correction every 3 years. This is simply the nature of the market and we were past due for a correction thus resulting in a normal occurrence that the market is accustomed to.
U.S. bull markets (long term) typically end due to a recession or a global financial crisis begging the question; Is this a garden variety correction or is it really the end of the bull market which began in 2009?
At BSG&L we feel that a near-term U.S. recession looks very unlikely. Economic data continues to be solid with the potential for acceleration in the second half of 2015. Domestic consumer confidence is up, which means their assessment of current conditions was considerably more upbeat, primarily due to a more favorable outlook for the labor market. Initial jobless claims data shows it is currently at its lowest point since 1986, which helps us measure the production and growth that businesses are having this year. Housing activity has picked up too, with both new home sales and housing starts & building permits increasing throughout this year, and there’s good reason for the housing improvement to continue. Each year since 2012 the demand for housing has been higher than the supply with current year demand increasing at a much more rapid pace than supply.
Second quarter GDP was revised up to +3.7% (up from +2.3%) on an annual basis and the service sector continues to run hot. When an economy’s GDP is up, it produces an optimistic outlook that should give investors confidence. The ISM Report on Business reflects a sharp increase in growth for the service sector while the growth in the Purchasing Managers Index has slowed down somewhat because of the energy correction, it is still expanding. Weak inflation numbers, concerns over global growth and market instability may keep the Fed on the sidelines for longer. Market expectations for a September rate hike have come down and FOMC commentary has become much more dovish.
Opportunity often comes where there is misfortune or a temporary set back. This recent pullback may have provided more compelling entry points into the equity market. The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative to its per-share earnings. It helps measure the value of an individual stock at a given point. P/E ratios are deflated right now due to the rash market sell-off which makes it a great opening to take advantage of and get into the market. If we take a look at last year, from January – September, the S&P 500 had a negative 10.5% return, while the full calendar year had a positive overall return of 11.1%. The 4th quarter alone built the year into a positive return. Historically, the period following a market correction (if not associated with a recession) has been quite resilient.
On an even more encouraging note, it seems that we may be breaking out to a new secular bull market. We need to understand time horizons. Historically (from 1896) the Dow Jones Industrial Average has mirrored a stair case graph; with extended periods of flat returns followed by a long period with equities on the rise. The last flat return period was from 1969 – 1982 which lasted for 13 years. Since 2001 we have had relatively flat returns. This makes our current time frame 14 years so far. With positive economic indicators and a time frame that is optimistically coming to an end, we could be on the brink of the next secular bull market.
The equity market will always have its ups and downs but it’s important to remember to not act impulsively with an emotional market. This market will adjust accordingly, and from an investor’s point of view, it can be financially dangerous to opt out. BSG&L believes that this is just another buying opportunity while equities are discounted. The key is to stay calm and recall that the markets will come back stronger in the near future.