So, We May Have a Bump Coming in the Market
For those that don’t know, the vast majority of analysts and institutional investment managers believe that the Federal Reserve will raise rates for the first time since the Great Recession December 16th. They also see this as an overall positive for the markets.
So if almost everybody (79.1% of economists and institutional managers as of 12/4) thinks the rate raise is coming and is a positive, why this article?
The equity and bond market reaction to the European Central Bank’s mildly disappointing stimulus package on December 3 seems to indicate investors are less prepared for a rate hike than the institutional consensus may think, whatever surveys indicate. In the last several days we’ve also seen markets selling off on any news that seems to support a decision to raise.
As a result, a positive market reaction to a hike the 16th is far from certain despite the consensus belief of managers. They may be right, but it’s important to understand how to react if the consensus is wrong.
Once the initial reaction is over, the market will likely turn its attention back to earnings, the broad economy, and stock market alternatives – -when that happens investors will realize they still have nowhere to go for yield and that US domestic stocks still represent the smallest risks out there as well as the best opportunities for risk adjusted returns. Markets will very likely stabilize and perhaps rise in the 5%-10% range in 2016, barring a new recession.
Instead of just taking my opinion, let’s look at some data. Since 1950 we’ve seen 9 true bear markets. Only 2 were not accompanied by a recession, one in the late 60’s and again in 1987’s Black Monday crash. Both of those bear markets were short duration and shallow vs. the average bear, with negligible impact on the portfolios of more astute investors — 1987’s crash came near the middle of the greatest bull market we’ve ever seen. Investors that panicked and sold missed out on spectacular returns in the coming years.
Why does this matter? Answer below the chart.
We can see from the chart above that it isn’t bear markets or periods of choppiness that investors need to fear, it is bear markets that go hand-in-hand with recessions. These are the markets that cause massive damage to portfolios – everything else is pretty much just noise.
Recall last week’s post on the why of the Recession Probability indicator, and the fact that it sounded warnings months ahead of most bear markets. It also clearly illustrated the benefit of staying invested absent a recession. For those that didn’t read it, here is a link – it is well worth your time if you are truly interested in long term investment success. CLICK HERE.
While the overall market may have been disappointing in 2015 and headlines seem to get progressively more alarming, the reality is that investors that ignore short term market noise and only react when recessions loom are richly rewarded for their perspective – this understanding of the markets can result in additional tens of thousands, hundreds of thousands or even millions depending on the size of the account.
To be clear – there does not appear to be an economic recession on the horizon at this point. There are some valuation issues in the markets, but that’s another conversation.
In conclusion, while I expect some short term difficulty whatever announcement the Fed makes on the 16th (and perhaps even a return to the August lows if the message is not communicated well), without a recession to accompany it the odds are vastly in favor of being rewarded for staying invested at this point.
Uncertainty is the friend of the intelligent investor and the bane of the emotional.
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To Smarter Investing,
Chief Market Strategist
ACI Wealth Advisors, LLC
Process Portfolios, LLC