While we never pretend to have the ability to forecast where markets, interest rates or much of anything is going in the future, we can certainly analyze where we’ve been and make assumptions as to why.
The first five months of 2016 proved just how fickle markets can be in the face of changing headlines. January and February saw markets driven down substantially by fears of a looming recession, a seemingly bottomless oil market, slowing growth in China, the Fed’s pending quarterly rate increases and the 2016 election.
March saw a strong rebound back into positive territory and things have fluctuated up and down along those more positive trend lines in the months since.
What has the rationale been behind this rebound?
The looming recession seems to be on hold. The bottomless oil market found its bottom, at least for now, and has rallied significantly since. Concerns about China’s slowing growth have subsided a bit and the Fed skipped a rate increase in the first quarter and continues to mull over a second quarter bump. The 2016 election? Well, those fears still exist as the market tries to interpret the likelihood and potential impact of either major party candidate being elected into the White House.
The point isn’t to suggest that those fears aren’t valid, that they’ve been wholly satisfied or that they can’t return again in an instant. It’s more to say that the market reacts faster than ever to new information and we need to change the way we think about short term volatility as a result.
We live in a world where fears are created and resolved at a rapid pace. This tendency causes more short term volatility in markets than we’ve historically seen as investors don’t have as much time to digest news and other information before reacting. This phenomenon reduces the possibility, assuming any ever actually existed, of guessing not only what might happen next, but how the market might respond as a result.
Diversification arguably becomes more important as well. In the example above, areas impacted by the fears raised earlier in the year included emerging markets, energy, U.S. politics and monetary policy. From what corner of the world will the next areas of fear and concern originate? No one knows for sure. As a result, it becomes less possible to be in the “right” country, sector or company and more important to own very small pieces of everything so that no temporary panic in any one area causes us irreparable harm.
In the face of an increase in the speed of information, our brains are wired to think we need to react faster to match that increase in speed. The truth of the matter is that sitting back, using market fluctuations to take profits when available in one area and reinvest those proceeds into areas temporarily not doing as well is likely to be an even more effective approach to maximize returns in an investment portfolio going forward.
In a rapidly changing world, the more things change, the more things stay the same.