A Rocky Start to the Year
Markets got off to a rocky start this year, with the S&P 500 experiencing a sharp 5% decline in the month of January, as plunging oil prices and weak global growth made investors fearful of a global and domestic recession. The opening-year decline left stocks teetering on the edge of bear market territory. But by the end of the quarter, the stock market had staged an impressive comeback, back in the black with the S&P 500 up 1.35% for the year, a mere 3% off all-time highs.
This epic collapse and rapid recovery has left many investors feeling relieved, but shell-shocked. So let’s recap what happened.
Back in January, investors had plenty of reasons to feel worried:
- Chinese stocks were crashing and there was concern their debt-laden economy would follow suit.
- Oil prices were in freefall.
- Bank stocks were selling off.
- Global markets were wildly volatile.
- Japan instituted its first-ever negative interest rate policy.
- And amidst all this turmoil, the Fed seemed committed to raising interest rates.
Markets Stage a Comeback
At the peak of pessimism on February 11th, the major U.S. indices were veering toward bear market territory. The Dow closed nearly 15% off its May 2015 high. The S&P 500 had declined 14% and the NASDAQ Composite was down 18%.
But one by one, the fears and obstacles that had sent the market into correction territory started to dissipate.
- The Fed held off raising rates on January 27th and its tone became more dovish.
- On February 11th, the day the market bottomed, JP Morgan Chase CEO Jamie Dimon sent a vote of confidence by plunging more than $25 million to buy JP Morgan shares. Good timing Jamie!
- Oil prices started to stabilize, helped by an OPEC pledge to curb production. The stabilization of oil prices helped lift some of the pressure off energy firms that were struggling to make payrolls, service debt, and just plain survive.
- The EU added more stimulus measures and China took steps to stem wild currency swings and steady its economy
- A slew of positive economic data in the U.S. assuaged investors fears that we were heading for a recession and/or a credit meltdown in high yield.
- And finally, the Fed revised its plan from four interest rate hikes, to only two.
But Are We Really Out of the Woods?
To quote SNL’s Roseanne Roseannadanna character and BofA Merrill Lynch’s co-head of Economics, Ethan Harris,
“It’s always something!”
As old risks rotate out, new ones surface. Check out this great chart from JP Morgan Asset Management demonstrating how there is “always something” to worry about.
As per usual, past risks are fading: 1) the Chinese economy appears to be stabilizing, 2) fears of a further collapse in oil prices is abating, and 3) price corrections have deflated the “bubble” in risk assets such as high yield bonds.
But just when you thought it was safe to go back into the pool, new risks loom ahead: 1) Europe is becoming an area of concern given recent terrorism and its refugee problem, 2) Britain’s proposed exit from the EU, coined “Brexit”, has the potential to be disruptive, and 3) the U.S. presidential campaign and political rhetoric could be another source of volatility.
There is always something to worry about, but over time, patient investors who do not panic during times of turbulence, will ultimately be rewarded.
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