Why You Shouldn't Panic About the Stock Market
An investment pro on why your best reaction is to stay calm
Markets aren’t off to a great start in 2016, leading many investors in their 50s and 60s understandably concerned about the dashing of their retirement dreams and the depletion of their hard-earned nest eggs.
Market naysayers have stolen the spotlight and are further inciting panic with their rhetoric. The World Bank on Jan. 6 predicted that global markets are headed for a “perfect storm,” with the largest emerging economies all slowing down at the same time. Billionaire investor George Soros likened current economic and financial conditions to those of 2008, pointing to the fact that the Federal Reserve’s recent decision to raise interest rates was proving difficult for emerging economies.
Nervous About Nest Eggs
All of this noise, coupled with subpar performance and returns throughout the last two years, has left many disenchanted with stock markets and wondering about the impacts on their retirement savings.
However, while conditions may not look rosy on the surface, especially when you look at the first few trading days of 2016, markets are still healthy and provide a reasonable expected return for both pre-retirees and retirees. There are, in fact, some positive signs and explanations for these negative trends that should boost investor confidence.
Let's look at what's been happening at U.S. corporations and what might happen.
The Energy Sector — and Everything Else
While corporate earnings fell for the first time in several years in 2015, the drop can mostly be attributed to the energy sector. Looking at the rest of the market, earnings grew between 6 and 8 percent, which is a positive growth rate. If energy prices level out, that would help the overall markets because those energy losses won’t pull the total numbers down. When looking at potential growth in 2016, picking up the slack from low energy costs will be difficult, but not impossible.
As a result of current oil prices, energy companies have cut capital expenditures. No other industry has picked up the slack and started large-scale investment projects in the U.S., leaving a gap that can become an issue, since corporate investing is about 30 percent of GDP (Gross Domestic Product). If other companies increase their capital expenditures and spending, however, that would help the U.S. economy grow.
Energy sector troubles will likely be countered by continual improvements in technology in other sectors. Areas such as virtual reality and 3D printing that are still in their infancies will eventually yield new products, services and experiences that will stoke demand, spending and create new jobs.
Financially Healthy Households
Turning the attention to the state of the American household, the health of the average consumer is encouraging, despite reports to the contrary. It has been reported that real median household income has fallen over the last two decades and that wage income is declining. However, there is an explanation for these trends.
The decline in real median household income can be attributed to the increase in households with zero earners — the rise in the number of retired and disabled people, which has increased from 18 to 21 percent since 1980. Fewer households with workers pull down the median household income.
However, of households with one or more earners, wages have gone up, albeit slowly. Coupled with low inflation, consumers have been able to bolster their balance sheets, increase their net worth, pay down debt and improve the overall health of their financial situation. All good.
Another positive trend: consumer debt, as a percentage of total income, is as low as it was in the 1980s. Consumers are financially healthy enough to spend and to invest, which should help the economy and market performance — and your nest egg.
Falling oil prices have also translated to extra cash for consumers through saving money at the pump. The public has saved most of that money and hasn't spent it yet, though this should change at some point, especially with prices as low as they are. The ability to spend and attractiveness of prices will eventually increase demand and that should be a positive force, too.
Based on today's low interest rates and low inflation, we believe domestic and international markets are fairly valued and have priced in low growth. Shares, overall, are nowhere near as expensive as they were back in 2000 and are not as cheap as in 2009, after the market meltdown.
Count on Greater Volatility
So what does all this mean for you in the face of significant volatility and alarming predictions about the health of the stock market?
It means that markets are functioning as they should, but we need to expect greater volatility than we have seen over the last two to three years, which has been abnormally low.
The dramatic stock market upswing we’ve seen since the end of the recession had to come to a halt at some point, and that time is now. This doesn’t mean the world is ending, but rather that we’re back to normal after a very healthy recovery.
Don't forget: every $100 invested in the S&P 500 is producing 5.2 percent profit yield, even with all the troubles in the energy sector. That’s a relatively good return compared to alternative investments.
After factoring in the positive indicators and explanations for the negative ones, boomers should still continue to see average real returns from markets over the next several years, which is reason enough to continue to invest in stocks to help you get to — and through — retirement.