Despite all the drama we’ve experienced in the past few months, the second quarter of 2015 has brought us slightly positive returns in many of the U.S. and global indices. It also has brought disturbing but ultimately harmless news in Europe, Greece, China and Puerto Rico.
For the second consecutive quarter, investors experienced a mild roller coaster of up and down days in the U.S. and global markets, small panics and surprising rallies that ultimately cancelled each other out in what trading professionals refer to as a sideways market. Here is a look at the second quarter and year-to-date performance of major stock indices:
Investors are looking over their shoulders at interest rates, waiting for the Federal Reserve Board to finally take its foot off interest rates and for bond yields to rise. This action could make bonds more competitive with stocks and potentially could trigger an outflow from the stock market that could cause a bear market in U.S. equities (so the reasoning goes). Of course, investors have been waiting for this shoe to drop for the better part of three years, and meanwhile, interest rates have remained at historically low levels.
There is widespread speculation that the Fed will raise the Fed funds rate by 0.25 percent in September, which could cause a mild panic among ordinary investors and quick-twitch traders, despite the fact that the Federal Reserve chairperson Janet Yellen has all but tattooed on her forehead her intention to raise rates sometime this year.
Another worry is China, whose Shanghai Composite Index has fallen 22 percent over a ten day period after a torrid 32 percent climb for much of the first half of the year.
All of these interesting excesses and potential catastrophes are unlikely to affect the average person’s diversified portfolio. The Greek situation will lead to uncertainty and volatility, but not to long-term declines in the value of U.S. or even European stocks generally. China’s market fall may be temporary, and it seems only to be giving back speculative gains—which is probably a good thing for the underlying fundamentals.
Meanwhile, the jobs picture in the U.S. seems to be improving by the day, oil prices are still low, and America is on a path to energy independence, which would have seemed unthinkable just a few years ago. Yes, the U.S. stock markets are long overdue for a 10 percent correction, but if you know when that will happen—or even what year—then you have a better handle on the future than most senior economists.
It bears repeating: investors lose far more money in opportunity costs by trying to avoid future market downturns while the markets are still going up, than by holding their ground during actual downturns in anticipation of a recovery. In every case so far, including world wars, the threat of nuclear war, Presidential assassinations and terrorist attacks on U.S. soil, the U.S. market has eventually made up the ground it lost in every bear market we’ve experienced.
The scary news today is, in the long run, nothing more than white noise, a lot of sound and fury signifying nothing important to the long, slow process of companies and their employees building value with their daily work activities. People who listen to the alarmists tend to lose out on solid returns. You should listen to the alarmists or believe that your portfolio is at risk because of a scary headline, at your peril. We recommend that you try to relax and enjoy the ride!