Don’t give up hope on 2016
Anyone who owns stocks has got to be feeling pretty bad at mid-month. We’ve just experienced the worst beginning to a new year in history.
The S&P 500 dropped exactly 8% in 10 trading days.
No respite was available in the other major indices. The Dow Industrials were marginally worse than the SPY. Last year’s best group, the NASDAQ, fell even harder, plunging by 10.36% since Dec. 31, 2015.
The very liquid and tradable SPY, DIA, and QQQ ETFs have all given back more than a full year of their previous gains.
Is there anything to be upbeat about? Sure.
The good news?
- Four of the previous nine “worst yearly starts” saw positive numbers over the balance of January.
- Six of nine “most horrendous beginnings” rebounded to positive annual returns on Dec. 31.
- The best four of those periods saw very satisfying full-year results.
- 2009, the previous champ stumbling out of the gate, ended up posting a 26.46% total return on the S&P 500 ETF (SPY, Financial).
By definition, valuations are much more attractive now than they were one year earlier. Even before the last week's carnage, the average stock was down much more than the cap-weighted indices.
Could America be in or about to enter recessionary times? It’s certainly possible. Does that mean you should get out of stocks even though they’ve already taken a beating?
Selling now and attempting to avoid further damage may prove to be counter-productive.
Franklin Templeton Funds put together this excellent chart of America’s last seven actual recessions, dating back to 1969. In every case, stocks bottomed during, rather than after, the end of the economic malaise.
Peak to trough declines varied from (-12%) in 1980, to (-57%) during the 2008 to 2009 bear market. The average worst-case plunge weighed in at (-33.86%). To have avoided those disasters you needed to sell out at the exact peaks, when euphoria was running highest.
Pessimists could correctly say that today’s situation, while already well off prior peaks, still offers quite a bit of downside.
Optimistic folks would likely note that the seven "trough to recession’s end" gains averaged 28.3%. Since nobody rings a bell at the bottom, anyone who exited stocks in the midst of bad times would have been unable to capture those significant pre-recovery gains.
During the seven-month long recession of 1980 and the eight-month long downturn from 1990 to 1991, shares hit their final lows pretty early on. Two of the other recessions saw stocks turn up near the mid-points of economic turmoil.
Waiting for confirmation of good news meant you’d waited too long to get back in.
So, should stocks should be sold now, after three pretty daunting months. The correct answer depends on your views on two separate topics.
1) Is America going into a full-fledged recession, accompanied by shrinking corporate profits?
2) Are you confident you can call a market bottom when it occurs?
In an era where cash earns next to nothing, I’d rather just own quality shares and wait for the inevitable rebound.
Disclosure: I own no index products. I don’t consider myself a market timer.
