When Will the Market Ever Get Better?Submitted by S Capital Wealth Advisors on January 21st, 2016
When Will the Market Ever Get Better?
(What I mean is: My plan says a 5% return and I’m going down!!)
Many investors, particularly those already retired, are getting increasingly worried over the last few months as they watch their savings go lower and lower. “What is going on with the market? When will it recover? I know there are ups and downs in the market, but I haven’t seen many “Ups” for too long and I hate watching my money go down”. This summarizes many conversations recently and to give perspective and hopefully some solace, I suggest that for most people with more than a 3 to 4 year time horizon things will likely get better. (We’ll get into why below). If investors don’t make any big mistakes now, there will be opportunities for growth down the road. Shockingly, this often doesn’t generate much relief as 2 to 3 years seems a long way off and even getting back to even in 2016 seems daunting. How far off we are from a rebound may become clearer in another month as we get earnings estimates from our major companies, but for now understanding the current challenges can give some light on how things can recover.
All of the following needs to be prefaced with "This is my read". First of all, I don't know (and don't believe anyone really knows) at what level the market will bottom. I believe the market will likely test the August 24th low of 15,871 on the Dow and may very well go a little below that level. But I do think we are nearing a strong support level. Where I differ a little from much of the commentary I hear, is the reason why it is dropping so fast, which only matters to the extent that we in the U.S. have some control over the reason. Rather than it just being about the China slowdown (which it does) and the drop in oil (which it does), I think it is equally tied to the struggling credit markets. There is very little liquidity in the bond market today for various reasons, many self-inflicted through our desire to make sure no one has any risk. Because people are concerned about bankruptcies in the high yield credits (many are energy and pipeline companies) and Fed interest rate increases, they are hedging their potential losses by shorting the stock market or selling stock and going to cash. When the US stock market and U.S. credit concerns get in alignment, the market can work higher (Is there a different word here than higher?). Today, we are worried about many companies, often energy and credit companies, reducing dividends because they don't have the current cash flow to cover their debt and also pay out dividends. When that happens, companies reduce their dividend to match sustainable cash flow and then the stock goes down even further (therefore the investor loses out on their dividend & their stock price). Even the Government is protecting itself as the Federal Housing Finance Agency just closed "a loophole" that gave Mortgage Reits access to low rate government money as it fears for its' own risk. This action in turn could raise mortgage rates and lower the housing market. We need to find a better balance between avoiding risk and promoting growth.
So where’s the good news? First and foremost the U.S. economy still appears relatively stable. Unemployment is low, the Fed is saying the economy is strengthening and the low energy costs should help many consumers (again, we will know more over the next 30 days as companies forecast their 2016). In the long run we need some rework of U.S tax law and the U.S. regulatory system to promote growth and some Government spending on infrastructure, but in the mean-time, I think the US economy is stable enough to hold the tide and work its way back up. China is doing what they can to promote growth in their economy. And while they are a big deal to commodity markets and to Europe which sells a lot of goods to China, I'm not sure it is as big of a factor to the US as it is being portrayed. I don’t think China is on its’ way up yet, but I think further negative news will have more limited impacts on the U.S market.
I don’t think Oil has reached its bottom yet but at 7% of US GDP, it’s not the impact of housing related spending. I still think the next few months could be harrowing, but that the full year could end up positive, not a lot given a projected GDP growth of 1.5% but up is up -- let’s start there.