While I did not stay up until midnight to ring in 2016, I did awake to the fireworks of other revelers in the neighborhood. And in considering the financial markets of the last couple of months, the chaos and noise of exploding fireworks come to mind yet again.
The S&P 500 declined -1.75% in December giving up its gains and then some for the year, causing the index to finish 2015 with a loss of -0.73%; the first annual loss since 2008. The index then started 2016 with its worst 2-week performance to start a year ever, losing -8.0%. In fact, of the 6 indices we track for purposes of benchmarking, the only index to experience a gain in 2015 was the tech-heavy NASDAQ; however, the NASDAQ has started 2016 by declining -10.36% over the first two weeks.
With the historically bad start to 2016, is it time to 1) avoid potential further declines by moving to cash 2) sit tight and ride this out, or 3) a little bit of both? It’s our view that option 3 is the best course of action at this point. In other words, don’t leave and miss the grand finale, but don’t get your hopes up either.
Based on leading macroeconomic indicators, we’re not quite ready to declare that we are in the beginning stages of the next bear market. Technically, a bear market is defined as a drop of 20% or more in the Dow or S&P 500 over at least a 2-month period. Some of the data we’ll be watching closely over the following weeks for further evidence are the consumer confidence and sentiment readings, the upcoming ISM service sector survey, and the margin debt report.
At over 6 years of age, the current economic recovery is one of the longest expansions in the past century. With the influence of politics, election years tend to be strong for the market and produce more and bigger winners than losers. However, given that the past three years are so out of sync with the normal election/market cycle, we’re not certain how 2016 will play out. We’ve positioned our clients’ portfolios to reduce the overall risk and are prepared for what looks to be a negative year. In light of this defensive stance though, we’ll still able to participate in positive returns if historical precedent and traditional election year stability prevails.
If you aren’t sure whether your portfolio is positioned properly for the current market environment based on the amount of risk that you’re comfortable with, we always provide a FREE 2nd Opinion Portfolio Review and would be more than happy to discuss your financial planning goals with you – please click here to schedule your meeting, or give us a call at 913.402.6099.
John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit http://www.chladekwealth.com.