For those who watch the stock market fairly closely, you may have recalled that we started the year with a decline in the double digits. Now we see the market up for the year, and only a few percentage points from its all time highs.
The increase is not large, as the broad based S&P 500 index is up approximately 2% for the year, as of Friday April 22nd. The Nasdaq index, with a significant weighting in technology stocks is still slightly negative.
What is interesting, is that what had been some of the weaker areas of the market have been the strongest performers recently. The Energy sector, which did terrible last year, and continued to be very weak to start the year, is now up 10% for 2016.
That same pattern is also occurring among international markets. Last year developed markets did better than emerging markets, and thus far in 2016 emerging markets are now the stronger performers.
Investors are certainly wondering what has transpired to have caused markets to have made this dramatic turnaround. In some cases there can be a specific event, or series of events that can cause markets to move significantly in either direction.
For this year there has not been any real specific event to have caused the markets to initially be very weak, and then later to recover. Essentially early in the year there was a high level of pessimism that the global economy was especially weak.
As things have been occurring thus far in 2016, this high level of pessimism to start the year was basically overdone. The odds of the likelihood of a global recession occurring have diminished, which has resulted in the market recovering its losses from earlier in the year.
This in no way implies that we have the all clear sign for the economy and the stock market. What it does say, is that the economic picture remains mixed, and will probably stay that way for a period of time.
The kind of market action we have experienced in 2015 and again this year shows how changes in market sentiment can impact stock prices. This is not implying that the stock market is irrational, but just that changes in expectations can affect stock prices.
An investor should also realize that just because an area of the market is doing well and something else isn’t, that trend will not necessarily stay in place for the long run. Last year technology stocks did better than energy, and this year the reverse is true. What this should tell an investor is that it is good to be diversified.
What an investor should also consider is that if one segment of the market has underperformed, that would be a good time to add to positions. For example if someone had a target of 10% in emerging market stocks, and that category did poorly where it became 7%, then it would make sense to bring that weighting back to the targeted level when prices are down.
It is always easy to try to analyze the stock market after the fact. When prices are down, it is easy to be pessimistic, and is understandable why people might want to sell. There is no way to know at the time of a 10% stock market drop, if that is the end of the decline, or whether there could be a further decrease in prices. However, history does show that prices will eventually recover.
If we compare where we started the year versus now, the overall market and economy have not changed that much. Therefore, whatever plan someone had at the start of the year should still be applicable now.
