The onset of 2016 saw the market having its worst start in recorded history. We may be in for a 'bad year', but here's what you need to know to get through it.
By Anna B. Wroblewska
This year, the market had its worst start in recorded history. Then, to add insult to injury, a recent Bespoke Investment Group report came to a conclusion that most investors are only just starting to ponder: that we're already well within bear market territory.
According to the report, the average stock in the S&P 1500 is down 24% from its 52-week high as of the first week of January. It's not just the smaller stocks crumbling, either: the S&P 500 is down just a hair shy of 20%.
Does that mean we're in for a bad year?
We may very well be. Here's what you need to know and how to get through it.
The rise of the bears
The study broke out the results by sector, and it's illuminating that the largest declines have been in energy (down 50%) and materials (down 31%). These should come as no surprise: with oil prices plummeting, a slowdown in China, and weak growth worldwide, it's unlikely that we'll see a rebound in these sectors anytime soon.
But consumer discretionary stocks are also sagging, falling an average of 28% from their 52-week high. How can that be, when unemployment is falling and gas is getting cheaper? Analysts see this as part of a troubling trend. Even with these improvements, Americans are still under pressure. High debt levels, low savings, and chronically high spending on education and healthcare mean less money to spend on other things. Of course, many consumer discretionary stocks are also exposed to economic cycles abroad, which just compounds the difficulties those companies are seeing at home.
The major concern is whether the fall in stock prices will continue. Some see trouble up ahead on all sides -- as market commentator Mark Faber recently told Bloomberg: “It won't matter much whether you own a Picasso or the S&P. It's all going to go down!”
Well, Picasso owners may weather the storm, but matters certainly don't look positive. The growth outlook in both Europe and Asia is poor, and these markets are of major concern to the three sectors most affected by the recent downshift in valuations.
Slow growth is one of the major contributors to low oil prices, and this trend in particular looks ominous for energy companies. Oil prices are at 12-year lows, and three major banks predict that oil will likely fall below $30 per barrel. As a result, up to a third of US oil companies could face bankruptcy, according to The Wall Street Journal. In other words, energy companies could see even greater falls in 2016.
Finally, there is also a chance that the infamous FANG stocks -- Facebook, Amazon, Netflix, and Google -- could fall back to earth soon, which would make the S&P 500's weak performance to start the year even worse. These four stocks returned more than 60% on average in 2015, but analysts are increasingly concerned that their valuations are completely unsustainable.
A fall in the FANGs would wield another blow to the S&P, which could very well take it firmly into bear territory.
What should I do?
In light of all the disturbing news, it's easy to grow worried. Should you wait it out? Sell? Invest in something else?
Times like these call for maintaining a steady hand on your portfolio. Instead of giving in to the urge to sell out or do anything drastic, go back to your big-picture strategy and try to step back to take the long view.
The coming year could very well end up being a time of volatility or even outright pain, but remember: the investors who do well in the markets tend to buy low, sell high, and stick with their long-term plans. Investing through a downturn can get you in when everyone is running for the exits, sometimes at excellent prices.
That's not to say this is a stress-free exercise, especially if you're looking to retire in the near future or rely on your brokerage account for income. In these cases, you might need to review your allocation and your options -- without letting emotion get the better of you. This can be tough, and a qualified advisor can help. If you're unsure of how to manage the situation or your stress levels (and are having trouble staying away from the “sell” button), you might want to consider speaking to a professional.
If nothing else, an advisor can help give you the peace of mind and confidence that you need to weather the tough times.
We may very well be entering bear market territory, but by seeing the forest for the trees you'll be able to see the benefits of lower prices and recognize the opportunities within the worries. As the famous Warren Buffet saying goes, "Be greedy when others are fearful and fearful when others are greedy." It's a good rule of thumb -- regardless of whether the market is defined by its bears or its bulls.
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