If it seems like your stock portfolio hasn’t gone up in a while, you’re not imagining it. On May 21, 2015, the U.S. stock market hit an all-time high when the S&P 500 closed at 2,130.82. In the year since, though, the S&P index has failed to set a new record, and is currently trading a little less than 4 percent below that peak.
To new investors, this might seem unexpected, but experts say the streak is easily explainable.
For one, it’s not the first time this has happened: The same pattern has occurred 20 other times since 1930. There’s also a lot of ambiguity now about the state of the economy, when the central bank will raise interest rates (which can make it more expensive to borrow money) and who the next President will be—all of which can affect markets too.
“The market has not reached an all-time high again for valid reasons,” says Chuck Self, chief investment officer of iSectors. “U.S. and international, especially Chinese, growth prospects have declined. The Federal Reserve increased short-term interest rates [in December], and the stock market could not handle the prospects of future interest-rate increases. The global geopolitical climate has deteriorated with increased terrorism and the rise of nationalism that threatens to derail free trade.”
In addition to tumultuous global news, history sheds light on another telling pattern, as President Obama readies to leave office. “While we think this year should end well due to positive earnings growth, the history of the eighth year of a president’s term is not encouraging,” says Certified Financial Planner Bob Phillips, managing principal of Spectrum Management Group in Indianapolis, Ind. “In the 10 cases since Ulysses Grant of a president serving eight years, during the eighth year, the stock market reported negative returns, on average, 60 percent of the time.”
Okay, that’s a lot of bad news. Is there anything good to report?
Fortunately, yes. While the market has had a lot of ups and downs over the last year, the U.S. economy remains in growth mode (albeit slow). And history shows that sustained lows are eventually followed by highs.
“I don’t think we should be worried; we would be similarly concerned if the market had continually hit all-time highs for the past year,” says Certified Financial Planner Bob Gavlak of Strategic Wealth Partners in Columbus, Ohio. “The market works in cycles. [So your] best bet is to stay invested and diversified with a disciplined approach, and not worry about the previous highs or lows.”
What’s Next for the Market?
While the market isn’t expected to stay in the doldrums forever, an immediate upward trend isn’t expected, either. “The market could be very volatile this summer,” Phillips says. “Britain votes on whether to leave the EU in June, the Federal Reserve is now hinting they will raise interest rates in June and there is dysfunction in the U.S. presidential election. This uncertainty should make for a volatile time.”
And countries around the world are dealing with slow growth too. Last month, the International Monetary Fund called the pace of economic growth around the globe “disappointing” and revised its forecasts downward for 2016. Brazil is in a recession, and the world’s second largest economy China is in the midst of a slowdown. (Its economy grew last year at the slowest rate in 25 years.)
What Should Investors Do Next?
With significant stock market volatility on the (short-term) horizon, Self says it’s more important than ever to have a diversified portfolio. That means including domestic and international stocks, bonds and inflation-protection assets, such as gold and real estate.
“In order to receive significant portfolio diversification, most investors should own exchange traded funds (or ETFs) and not individual stocks,” Self says. “Given the market conditions we are currently experiencing, investors should be concerned about an individual stock’s decline torpedoing a total portfolio’s return. But by owning a differentiated group of low-cost ETFs, investors will receive diversification throughout their portfolios.”
Once you’ve ensured your portfolio is diversified, hold steady. “Maintaining asset allocation can be tough when one sector continues to outperform or underperform another, but that’s the important distinction in maintaining a strategy,” Gavlak says. “Don’t bail on an asset class just because it hasn’t performed in the short term because it is necessary as part of a balanced strategy for the long term.”
At the end of the day, that’s the key: focusing on the long term—and remembering that the market will eventually rebound. “Volatility feels bad,” Phillips says. “[But] as we enter the fall, and get a little more clarity on presidential leadership going forward, we think the market will stabilize and move to new highs.”
May 23, 2016