After the stock market experienced its worst quarter since 2011, it’s time to reflect and offer some advice on how to handle turbulence. Some of you may have looked at your September 30th statement with shock and disappointment. The good news is that October was a great month, and most major indices (it all depends on the one you look at) rallied in October to practically negate the slow burn of the third quarter. Before you celebrate, we think it is important to keep all of this in perspective.
We can save you some reading by offering this advice-if you want to grow your portfolio over time, and want a fighting chance at outperforming inflation, stocks are the best bet. If you question this basic idea, consider this. At the close of the market on Black Monday, October 19th, 1987, the Dow Jones Industrial Average stood at just 1,783.74 (Source: Yahoo). As of October 19th, 2015 it was over 17,000. That’s an average annual return of 8.52% during a period that included a tech bubble, a recession and financial crisis and a major terrorist attack. What else do you need to know?
If you want to know more, read on.
Many experts credit Fed policy for the above-average growth spurt that the stock market has experienced since 2008. The Fed pulled many levers and switches which amounted to throwing a five-year soiree. As the punch bowl has gotten down to nothing more than a few melting ice cubes, it’s important to understand that the next five years are unlikely to look quite as good as the last.
With the S&P 500 Index up more than 14% over the last five years with so much Fed help, and the long-term average for the eighty-six year period dating from 1928 through 2014, of just under 10% (Source: NYU Stern College of Business), it’s hard to see how stocks can continue increasing in value at such a blistering pace.
We believe in “reversion to the mean”, which simply means that after a stretch of above average returns, it takes a stretch of below average returns to get back to normal. We are not predicting a doomsday scenario, we are simply saying that now is not the time to change your strategy to a more aggressive one.
In the short term, we would point out that, day in and day out, much of the financial news seems to be caught in some sort of Groundhog Day realm of recycled news. When the market is down the headline reads, “Market Down on Interest Rate Fears”. When the market is up, “Market Shrugs off Fed Hike and Finishes in the Black”. These two headlines, and various versions thereof, are beginning to sound like a broken record.
So before you buy the nice October rebound, remember, the Fed still hasn’t made their decision. Until they do, expect to see a good bit of volatility, and remember, it’s hard to beat the last five years.