Investing in uncertain times
WEEKLY MARKET COMMENTARY |
Let’s face it. People can always come up with a list of reasons to not invest. Throughout history, people have elected to not invest in reaction to many things, whether it be world events, the U.S. economy, or a variety of other factors. Certainly the last 10 years haven’t offered an exception. But let’s examine some of these fears, both current and past, in light of your overall investment strategy.
The stock market uncertainty that occurred with the announcement of Donald Trump’s presidential victory faded quickly. Dow futures were down as much as 900 points in the early morning hours after Election Day 2016. By the time the market closed Wednesday, Nov. 9, 2016, the Dow Jones Industrial Average (DJIA) closed 257 points higher. As of Jan. 26, 2017, the DJIA closed at a record 20,100. However, since that record close, market volatility has increased as evidenced by the VIX, a measure of implied volatility of S&P 500 index options often referred to as the fear index, which rose 14 percent in the last five days of January.
While the election results are a major investment theme as we look towards 2017, central banks, China and commodities were key focus areas heading into 2016. The Federal Reserve raised interest rates twice. Central banks of other developed nations, such as Germany and Japan, actually lowered rates into negative territory. We also observed commodity prices stabilize while China continued to depreciate its currency against the U.S. dollar hoping to stimulate growth.
Several additional investment themes currently being discussed as we head into 2017 include the continued role of central banks in the global economy, and whether politics will undermine economics when it comes to overall globalization, trade, and taxes. There is also some concern in the U.S. about President Donald Trump’s planned infrastructure investments. For example, will deficit spending associated with the planned infrastructure investments lead to inflation, and ultimately, higher interest rates?
Before you make any hasty changes to your investment strategy, consider that a major component of market returns come from uncertainty and risk. Every year there will be several unknown events that occur which impact global markets. The timeline below lists several of these major, perhaps unanticipated, events since 2007.
2007 – Subprime lending crisis
2008 – 2009 – Bear Stearns and Lehman Brothers declare bankruptcy, leading to the “Great Recession”
2010 - Flash crash – second largest intraday point swing in the DJIA of 1,010 points
2011 – Standard and Poor’s downgrades U.S. debt below AAA
2012 – Hurricane Sandy devastated the northeast
2013 – Taper Tantrum, bonds sell off as fear grows the Federal Reserve will raise interest rates
2014 – Geopolitics ruled the day as Russia invaded Ukraine
2015 – Crisis in Greece
2016 – “Brexit” – United Kingdom votes to withdraw from the European Union
2017 – ?
What are the implications for your investment strategy and your ability to save and/or invest? Successful financial planning requires the ability to focus on the things you can control. Understand that your financial plan is based on your goals, factors in your investment time horizon, and is designed to serve you through both favorable and unfavorable markets. Keep saving and investing. In uncertain markets, regular investing can be a good strategy to manage risk. Properly planned asset allocation can reduce the effect of volatility over time. Manage the effects of volatility with periodic rebalancing.
As noted above, there are always reasons to not invest and the markets will occasionally suffer unexpected setbacks. The difference, though, is how you respond to these declines. The ability to stick to your financial plan can make a significant difference in your overall financial success.