The Opening Bell

Articles from The Opening Bell

Consider the Roller Coaster. . .

by James F. Bell, CFP®, President & Founder

January 2016

I was born with a sensitive stomach. Among my three siblings (I was the third of four), I was always the one to get carsick. Even today, driving to Muir Woods or Stinson Beach makes me sweat, and I have to be the one driving or there could be a disaster. I am never the one to run for the roller coaster line at the Santa Cruz Boardwalk or Disneyland, that’s for sure. In a weak moment when my nieces, nephews, cousins, or kids implore me to ride with them, it can spoil my whole day. I am happier sitting on the sidelines entertaining the grandchildren and guarding the coats and purses.

The stock market in 2015 was a roller coaster ride with plenty of drama and historic events, such as the largest correction (down 12.4%) since 2011 and the first Federal Reserve interest rate hike in almost 10 years, combined with tremendous turmoil overseas. What is true about roller coaster rides is that after the screaming, excitement, fear, and sometimes stomach upset, you end the ride right where you started. This is pretty much true regarding the U.S. stock market in 2015. After all the drama, investors ended up where they started: almost flat to slightly negative.

One thing that is different about the U.S. stock market compared to the typical roller coaster ride is that 72.4% of the time investors end up at a higher level than where they started. More often than not, investors are rewarded for the roller coaster ride. From 1926 to 2014, the S&P 500, including dividends, has gone up 63 years (72.4%) out of the 87 years in this period, which includes the Great Depression and the Great Recession. Conclusion: a disappointing year in the stock market should not cause investors to abandon the ride.

What could cause the ride to be positive in 2016?

1. The U.S. Congress is more functional, and the next debt ceiling debate won’t occur until 2017. Congress gave us a self-inflicted wound in 2011 when some of the representatives seriously recommended that we should default on U.S. Treasury Bonds. In 2013, Congress forced a shutdown of the government. Today, spending bills are passing with efficiency, including a multi-year highway funding bill, which will help stimulate the economy and help improve the labor market, not to mention that it will improve our infrastructure which has been seriously neglected.

2. S&P/Case-Shiller Home Price Index covering the entire United States rose 5.2% in the 12 months ending in October. This contributes to the wealth effect which causes U.S. homeowners to feel more secure and more willing to spend.

3. Yes, interest rates are rising, but interest rates historically have caused trouble for the stock market when the 10-year Treasury yield gets to 6%. This yield currently is slightly above 2%, so we have a long way to go before interest rates dampen the stock market.

4. On December 18, the Wall Street Journal published a study about Lincoln, Nebraska where the unemployment rate is down to 2.3%. The national rate is now at 5%. Lincoln is a manufacturing hub so these are mostly good-paying jobs for skilled labor. Average hourly earnings have increased by 11% in the past year. One year ago there were 18 metropolitan areas with unemployment at 3% or lower. Today, there are 31 metropolitan areas with this distinction. We are beginning the sixth year in a row of producing at least two million jobs per year, which compounds our economic growth. There has been some criticism that too much of this job growth is for the lowest paying jobs, but the unemployment rate for college graduates (the highest paying jobs) is at 2.5%, so the high paying job category is in good shape as well.

5. The demand for office space in the U.S. is way up, reflecting a vigorous trend for business expansion.

And yes, there are many things to worry about: the weakening economy in China, the new hostility between Saudi Arabia and Iran, and other perils — but don’t let this discourage you from staying on the ride. The odds are in your favor.

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