RETIREMENT TIPS: Short-Term Volatility, Long-Term Gains for 2016

By ALAN KONDO, CFP, CLU

Last year, we saw an unusual market that seemed split in two. The U.S. market was relatively stable because the U.S. economy continued to do well. Corporations made good profits. The housing market had good gains, with analysts predicting that it would continue to grow for another four years.

As a result, construction hit record numbers. Lower gas prices at the pump put more money in people’s pockets and stimulated growth. Nevertheless, the U.S. market was negatively affected by overseas uncertainty. The Dow Jones Industrial Average, a basket of 30 large U.S. companies, ended the year losing 2.2%. the Standard and Poors 500, representing the 500 largest U.S. companies, fell 0.7%.¹

The international market encountered one challenge after another. It started over a year ago, with Russia’s invasion of Ukraine. This was followed by the Greek debt crisis, then the slowdown of growth in China, and finally the terrorist attack in Paris. International market performance mirrored this volatility. Many analysts were surprised that after a roller-coaster year, the Shanghai composite index ended the year up 9.4%, and the Stoxx European index closed up 6.8%.² The lesson is that even during a period of heightened volatility, long-term gains can be quite good.

In 2016, markets will experience continued short-term volatility, as we have seen with the Jan. 3 drop in reaction to slowed growth in China. In the long term, however, we are apt to see continued growth in Europe as a result of lower interest rates implemented late last year. China should stabilize as well, as it shifts its economy from one fueled by trading with other countries, to one that is driven more by internal consumer spending, similar to the U.S. Although China’s growth has slowed to 6.3%, this is still twice the U.S. growth rate, and is a more sustainable number.

Last year, the U.S. market experienced uncertainty over when the Federal Reserve Bank would begin to raise interest rates. Fortunately, this is now behind us. Janet Yellen, the chair of the Federal Reserve Bank, raised interest rates by ¼% in December. She will probably continue to implement small increases over 2016. This should have a minimal impact on market returns, since interest rate increases have been anticipated for over a year, and the impact is already priced into the market.

This will be a year to avoid high-yield or “junk” bonds and long-maturity bonds. This is because investors tend to move their money out of riskier investments like high-yield bonds if they can get a decent interest rate in safer investments like Treasuries. They are also inclined to move money out of long-maturity bonds in a rising interest rate environment because they don’t want to be locked into low-interest investments.

History has shown that the best-performing asset class doesn’t hold the position very long, and changes quickly. U.S. large company investments, like the Standard and Poors 500 index, have had a good run since the bottom of the recession in March 2009. It’s possible that in the coming period, U.S. small companies may start to do better than U.S. large companies.

International investments are also overdue for a rally. In 2000, when international was the worst-performing asset class, many investors were impatient and sold their international holdings. In just a couple of years, international went all the way from the bottom to the top, and held that position for nearly a decade. It pays to not let yourself be thrown off course by the emotion of the moment.

The uncertainty over who will be elected president this year, and which party will come into power, will probably be reflected in increased market volatility up until the elections. The market likes a balance between the parties, because tax laws and government policy are unlikely to change very drastically. This is likely to be the case in this election, and the market following the elections may be characterized by greater stability and smoother growth.

One of the more reliable strategies in a volatile market is to build a portfolio that is just the opposite of “putting all your eggs in one basket.” It’s difficult to guess the best-performing asset class for the year, even for research firms that study investments 24/7 with analysts stationed around the world. When you have a globally diversified portfolio that balances all of the available asset classes, no matter which asset class is performing well, you will have some assets in that asset class and benefit from its good performance.

Although 2015 was a down year in general for the market, it was far better than the 40% dive that the Standard and Poors 500 took in 2008 when the country was in financial crisis. We know the market never goes up in straight line, and a year of poor performance is normal. The market can be unpredictable in the short term, but the long-term performance is impressive. Today, the Dow Jones Industrial Average is 17,159. In January 2009 it was 8,953. Taking advantage of the market’s long-term potential is one of the better ways to beat inflation and accomplish your family’s most important goals.

¹ Wall Street Journal 12/31/2015

² Wall Street Journal 1/3/2016

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The opinions expressed above are solely those of Kondo Wealth Advisors, Inc. (626-449-7783 info@kondowealthadvisors.com), a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, Inc. nor its representatives provide legal, tax or accounting advice.