First, we’re going to look at the history of the bull market from 2008. In August 2015, we had our first correction in four years. The market was down 11%. Some of the emerging markets and foreign markets were hit even harder with the strengthening of the dollar. The previous correction was in August 2011 — a 14% correction.
What has been atypical in the past four or five years is the reduced downside volatility in the US stock market. The five years ending December 31, 2015, saw the end of Standard & Poor’s bull run, including reinvested dividends, of 81%. For those who were eager to get out of a quote-unquote “scary market” five years ago, thank God we kept them in. That is the point of an asset allocation. We get to keep the winners, even if we’re not sure they’re going to win.
This has been a breather from an extraordinary bull run since the crash of 2008. What about the rest of 2016? There are three leading indicators that make us believe this is not a systemic crash. Not really. It’s just a recessionary breather. Maybe not even a recession.
First, the yield curve is not inverted. When that’s inverted, it’s a very reliable leading indicator of recession. Second, the leading economic indicators, though they do show signs of fatigue, are not negative. They’re not falling. Third, the forward-looking price-earnings ratio of the market is just 17. That suggests what we’re seeing today, after this correction, is a fairly valued market.
The fundamentals strongly suggest that the markets are just taking a breather. The global markets are not being hurt as badly as people think. It’s being exaggerated domestically by the strength of the dollar, but — as with all things — this, too, will pass. That is also why a broad, diversified asset allocation will give us the advantage of recovery sometime in the future.
Source: “Bulls Regain Their Footing Friday, As Stocks End a Bad Month with a Huge Gain.” AdvisorSites.com, last modified 2016. http://contentsrv.advisorsites.com/showarticle.asp?domain=&article=3516&show=one.