There is a saying “May you live in interesting times” and we sure do, at least when it comes to the financial markets. The first week of 2016 was the worst start to a year in the history of the S&P 500 down 6%. This put the market back into correction territory (10% or more drop from its highs) where it was for a short period of time in August. Interestingly, the more volatile Russell 2000 small cap index is down 19.2% from its high. Many people consider a drop of 20% or more to be indicative of a bear market.
So where do we go from here? Well, if history is an indicator then we have a fifty-fifty chance that the market will be higher at the end of 2016. Since 1950 there have been 24 times that the S&P 500 was down at the end of the first five days of trading and in 13 of those times (just over half) the market ended the year up. However, history does not drive markets; fundamentals, the economy and investors’ emotions do. Outside the U.S. all three of these things are a concern, especially in China and the Middle East. In the U.S., however, we see the economy as generally sound and growing; and fundamentals, while high on a historical average, are not out of line with where we are in an expanding economy. Emotions of course are another matter! Experience tells us that while investor sentiment and emotions tend to drive short-term volatility, over time it is the economy and fundamentals that will drive the market.
Trying to time the market is often difficult, if not impossible, because it is driven so often by emotions and a herd mentality. I do find, however, that investors are often rewarded for purchasing quality companies when others are selling. One of my favorite quotes from one of the best investors of our time, Warren Buffett, is “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.” January has clearly started off as a month when many are fearful.
So where to focus today?
As always it is important to evaluate your individual portfolio for adequate diversification to asset classes, stock and bond sectors, and regions of the world. Within an adequately diversified portfolio and accounting for your particular time horizons and risk appetite I like and would therefore overweight US equities and adjustable rate debt. Within US equities we suggest overweighting sectors such as technology and financials. A full list of our suggested overweights as well as explanations for each one can be found at our website.
Susan McGlory Michel is the CEO of Glen Eagle Advisors, LLC. For additional information regarding Susan or Glen Eagle, visit www.gleneagleadv.com. If you are interested in scheduling a free portfolio review call 609-631-8231 or email email@example.com.
Disclosure: This commentary is furnished for the use of Glen Eagle Advisors, LLC, Glen Eagle Wealth, LLC and their clients. It does not constitute the provision of investment advice to any person. It is not prepared with respect to the specific objectives, financial situation or particular needs of any specific person. Investors reading this commentary should consult with their Glen Eagle representative regarding the appropriateness of investing in any securities or adapting any investment strategies discussed or recommended in this commentary.