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Stock market rollercoaster could become the ‘new normal’
Last week marked a bit of good news for investors, with the S&P 500 and Dow charting their first three-day wins of the new year, and as of Wednesday, stocks had made their best three-day performance since August.
But a slow start to the new year has drawn comparisons to one of the more tumultuous times in the market’s recent history — the 2008 recession. In fact, the Dow has suffered its worst start to a year since 2008, signaling what could be a bumpy ride ahead.
“To say that it’s not started out the way a lot of people were hoping is maybe an understatement,” said Robert Peel, the branch manager of the Grand Rapids and Kalamazoo offices of Robert W. Baird & Co.
But while the first-quarter volatility of the market has some analysts crying recession, Peel is more optimistic about the coming year.
“I think the lesson from it is that it’s kind of becoming the new normal to have this volatility in the market,” he said.
“There are big swings up and big swings down because so much attention is focused on the short-term results, but the economy is still plugging away.”
Those signs of a healthy economy are evident every day in the low unemployment rates, low interest rates and cheap gas prices. And while lower gas prices result in lower returns for the energy companies in the S&P 500, they also provide direct savings for consumers that they can pour into other industries.
“That’s real money for real people,” Peel said. “And that is kind of a consumer benefit that allows people to spend that money elsewhere.”
Peel cited a recent report from First Trust Portfolios, which tracked the S&P 500’s yearly returns dating back to 1980. The study revealed the market experiences a significant correction each year, averaging about 14 percent across the last 35 years.
The study concludes that, although past performance isn’t necessarily indicative of future results, history shows staying the course results in higher returns.
“If you’re a long-term investor, you understand that this is just what markets do,” Peel said.
“In the short run, I think this is a normal kind of correction, and people could make the case that stocks have gotten kind of expensive since there hasn’t been correction like this recently. But the normal pullback is nothing to be too concerned about.
“I don’t anticipate massive losses, and I think often in our industry there are people who prey upon other people’s fear that there’s going to be a major debacle that loses them money.”
Thanks largely to the market’s growth over the last six or more years, the slow start to 2016 has the market fluctuating wildly. When several years of growth are strung together, the slightest signs of a decrease can cause extreme reactions.
Peel said when a client comes to him with concerns about the market, he relates an anecdote about the client’s morning. The client might wake up, check the news on a Sony television, brew a cup of Maxwell House coffee, send a text from an Apple smartphone, stop for gas at a Mobil station and pick up breakfast at McDonald’s. In just a short couple of hours, Peel concludes, that person has touched between 10 and 30 publicly traded companies, just like millions of other consumers do.
“So either you think those are well-run companies that are going to be around for many more years because of how much you personally use them, or you can decide to get out,” he said. “And that can give some peace of mind.”
Despite that volatility, the equity markets have stabilized since hitting lows Jan. 20. The United States market appeared to be vectoring toward a new low heading into the Valentine’s Day weekend, but a late-week turnaround brought the six-day skid to an end, providing a measure of confidence, according to Baird chief investment strategist Bruce Bittles’ weekly report.
A recent CNNMoney survey of top investment strategists reports most experts believe there is about a 50 percent chance of the United States sliding into a bear market sometime this year, though they are optimistic the fall would be short-lived.
While coming close, the U.S. markets have not yet fallen into the bear territory with which global markets are grappling. CNNMoney reports those experts believe the S&P 500 will bounce back with an extreme rebound, ending the year with a 2.5 percent gain.
That prediction is in line with Peel’s advice to stay in the market and weather the storm.
“There’s a famous saying by Peter Lynch: ‘The real way to make money in stocks is not to get scared out of them when they go down in value,’” Peel said. “And that’s been my philosophy and one I share with investors.”