Several of the most volatile weeks in the history of the stock market are behind us. To offer some perspective, let’s take a look back before we look ahead.
If one focused on the 2015 returns in the stock market, one could conclude that there was hardly any activity in 2015. As the year began, most investors felt that 2015 would prove better than the last. The S&P 500 hit an all-time high on May 21, and guarded optimism started to grow. Many thought that oil prices had stabilized, and might actually bolster the economy in the short-term. China appeared to be continuing its remarkable rate of growth.
But volatility was underpinning this apparent stability, making 2015 a year of unforeseen extremes. For example, there was a brief period in August, when the S&P 500 fell more than 10%, only to rebound fully by November. By year-end, it had fallen again. The net result was that the market ended the year pretty much where it began.
Three large financial themes seemed to govern the financial markets during much of 2015: a steady decline in oil prices of approximately 30%; currency devaluation in China; and a Federal Reserve that only in December reluctantly felt comfortable enough about the U.S. economy to raise interest rates by one quarter of one percent.
The high volatility of 2015 offers good fodder for looking toward 2016. Could anyone have predicted the start to 2016 that we have experienced? One can choose from a menu of variables that could cause another year of high volatility: oil prices; the impact of actions by the Federal Reserve; the stability of the job market—the list goes on, and these are just the financial variables. Outside the U.S., concern about China continues to run high, yet reports show that the direct impact of the Chinese economy on the US is relatively small. (7% of US exports go to China, which translates into an impact on the United States GDP less than 1%).
So what should an investor who seeks reasonable returns do? At GW & Wade, two of our core principles are asset allocation and risk management. If one’s asset allocation made sense before a market spike or tumble, then it will likely continue to make sense during and after. Chasing a specific investment or asset class, or trying to time the exit or entry into the market, has almost always proven to be a foolish game.
We also promote strict attention to an investor’s tolerance for risk. The market swings over the last twelve months, not to mention these last weeks, continue to support the importance of risk management within the investment process. There will almost always be investment classes that outpace the broader markets and others that do not. By diversifying across different equity and fixed income categories, it becomes possible to enjoy reasonable, long-term performance, while at the same time reducing, and better managing, the volatility and risk of one’s portfolio.
As we look to the year ahead, we believe that many of the issues in 2015 which caused volatility in the markets will continue in 2016. Which brings us back to our first principles: assessing tolerance for risk and volatility, and having confidence that, over the long-term, a well-diversified portfolio, across a variety of asset classes, should help weather the short-term ebbs and flows of the markets.
The information provided above is general in nature and is not intended to represent specific investment or professional advice. No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from GW & Wade, LLC, which can only be provided through a formal advisory relationship. Diversification and asset allocation do not ensure a profit or guarantee against loss.
Clients of the firm who have specific questions should contact their GW & Wade counselor. All other inquiries, including a potential advisory relationship with GW &Wade, should be directed to:
Neil Goldberg, Principal
GW & Wade, LLC