Volatility has persisted throughout the start of 2016, to the point where it almost feels relentless. Coping with volatility is rarely easy for investors, and the fact that we’ve experienced the worst 10-day start to a calendar year1 has many wondering if it makes sense to shift away from equities for now.
No one can say with certainty whether the stock market will recover quickly and finish the year positive. But what we can control is how a portfolio is allocated in a volatile environment. For investors, we think it is less about: “should I go to cash and/or be more defensive?” and more about: “is my portfolio diversified sufficiently (to help reduce volatility), and should I consider including a tactical strategy in place designed to take defensive action in a prolonged downturn?”
In other words, we think it is more important to have confidence in your asset allocation versus trying to forecast what's ahead for the markets.
Check Your Asset Allocation, and Stay the Course
If your asset allocation is consistent with your investment objectives and is sufficiently diversified across asset classes and style, a sound strategy for you may be to try and keep cool amidst the negative news stories and stay the course. The Chief Global Strategist of JP Morgan, Dr. Kelly, sees several reasons to remain optimistic even in the face of such pronounced volatility.
In JP Morgan’s Q1 2016 Market Overview (give us a call if you’d like a copy), Dr. Kelly and his team suggest that economic growth could accelerate in 2016 due to strong consumer spending (on account of very low gas prices and low unemployment), and could also get a bump from the multiyear transportation bill and multiyear corporate tax breaks passed in December in Washington.2
Combined, Consumer Spending and Government Spending are Big GDP Contributors
Dr. Kelly also expects earnings to recover, the weakness of which they think held back stocks in 2015. Indeed, aggregate S&P 500 earnings were blunted in 2015 – hit hard by falling commodities prices and the surging U.S. dollar. But JP Morgan expects those macroeconomic headwinds to fade in 2016, and with expected nominal GDP growth of 4% they expect earnings to grow 5% - 7% in 2016. This improvement could bode well for stocks, and should be considered thoughtfully by long-term investors.2
Need a Sounding Board in This Volatile Market? Call a Wealth Manager
Volatility is a normal feature of investing in the stock market, but that does not make it any easier to handle. Sharp downward swings can be gut wrenching at times, especially when there is a lot of uncertainty dotting the headlines. Although not a guarantee against loss, at WrapManager we believe a well-diversified portfolio with experienced and proven money managers is a good way to address market volatility. The question is, does your portfolio have both of those things? Call one of our Wealth Managers today at 1-800-541-7774 to have a discussion and find out. Or, if you feel more comfortable contact us here to start a conversation.
Sources:
1. MarketWatch
2. JP Morgan
