Since May of 2015 the U.S. Stock Market has experienced dramatic fluctuations. The Dow Jones Industrial Average, one of the primary indexes used to track the U.S. stock market, has literally bounced up and down like a yo-yo.
As you may recall our 3rd quarter 2015 Commentary was titled Two Down and Two to Go. This referred to four events we felt needed to happen as the economy strengthened. THE FIRST was a -10% correction in the Dow Jones Industrial Average. That happened in the spring and summer of 2015 when the Dow went from 18,312 to a low of 15,666.
Over the last few years circumstances have arisen which have allowed us to anticipate certain events with a much higher probability than normal. Following are four of these events, two of which have occurred and two we are still expecting.
Since the financial meltdown in 2008, the Federal Reserve has instituted 2 major policies. The first policy was to lower the Federal Funds interest rate to virtually zero and keep it there. The Fed has kept interest rates between 0% and 0.25% for the last six years. To keep interest rates this low for this long is unprecedented.
The 4th quarter of 2014 and the 1st quarter of 2015, when taken together, show a good example of the value of diversification. During October, November, and the first part of December the price of crude oil dropped precipitously. This unusually large drop in the price of oil effected many parts of the market. However, the three market sectors hit the hardest were:
In 2014 the media was filled with news about the Dow Jones Industrial Average setting record after record high. It closed on December 26th over 18,000 for the first time ever. However, on Jan 6, 2015 the Dow closed at 17,371 – a 667 point drop (-3.7 %) in 5 trading days.
As we publish this commentary on 10-15-2014, the DJIA stands at 16,141. On September 19th it stood at 17,279. So in the last month the Dow dropped 6.6%. Most of you are aware that we have been expecting this for some time.
In June, the Dow Jones Industrial Average briefly closed at an all-time high of 17,068. Obviously there is a lot of investment optimism for the U.S. stock market. Most economists agree that there is reason for long term optimism. However it would not be surprising to see a temporary correction before the market goes higher.
Which is better, to catch the market highs, or to cushion the market lows? In order to answer the question above, it is important to take a historical look at different types of portfolios over volatile periods of time. For most of us, the period from 1999 through 2013 was the most volatile timeframe for financial markets we have seen in our lifetimes.
The first thing we learn as Financial Planners is that no one can predict the future when it comes to the stock market. The best we can do is build diversified asset allocation portfolios, which allow us to participate in the markets while giving us some margin of protection on the downside.