The first few days of 2016 have brought us sharply lower, roiled markets. The S&P 500 had its worst start to a New Year in history. There have been several reasons for this drop; among them, North Korea claims they have tested a hydrogen bomb, and analysts are concerned over slower global growth- particularly in China. The U.S. and world markets are down in sympathy.
Please be assured we are monitoring the markets, the news, and earnings season very closely and remain poised to act if we believe it is necessary.
We maintain our position that the bull market in the US, while mature, will not be ended by market volatility or fear, but rather by a recession. Recessions are typically what ends bull markets, and from a fundamental perspective, the US economy continues to improve. Friday's payroll numbers were better than expected1, and today marks the beginning of 4th quarter earnings season, a quarter that has seen expectations cut significantly due to oil's continued price collapse, among other things. With expectations as low as they are, there remains a good possibility that companies will surprise to the upside. From a technical perspective there are many issues at work, among them the possibility that our market is making a "higher low" from the last significant drop late last summer- a potentially positive scenario. Additionally, we could be forming what's known as a triple-bottom, where our markets may fall near the levels seen both in late August and late September, before beginning to climb back up.
Another consideration is that this year is an election year. The average return for an election year since the beginning of the 20th century is 9.45% even after including the -39% debacle experienced in election year 20082. While this historical bit of information in no way affects what we may experience in 2016, it does provide some historical context. In 2008, we entered into a recession which ended a several-year run of positive returns for the market. A recession technically means two consecutive quarters of lower Gross Domestic Product (GDP). Thus far we have not seen any indication that GDP will turn negative.
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Markets go through cycles, and even within a longer-term upward trend they do not only go up. It is during these difficult and challenging periods that good financial planning is highlighted much more so than if markets only ever went up. It is here that I confirm the importance of being flexible, utilizing diversification, and, as I have said many times, using non-correlated asset classes whenever possible.
Be assured we remain vigilant, and poised to act if there are any changes to the outlook. We will continue to provide these updates until this period of volatility has subsided.
Thank you all for the trust you have placed in me and our firm. It is a tremendous and awesome responsibility for us, and one we do not take lightly.
Bryan K. Kaarlsen
President and Chief Wealth Manager
KFSG Wealth Management, LLC
- U.S. Department of Labor Bureau of Labor Statistics, Economic News Release: “The Employment Situation - December 2015”. www.bls.gov
- Ned Davis Research, Inc. “Presidential Cycle and the S&P 500” (122531) http://www.federatedinvestors.com/FII/leaf/display.do?cid=122531&link=ewef
Past performance is no guarantee of future results. For illustrative purposes only and not representative of performance for any specific investment.
S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.