In reflecting on the year gone by, at least through the lens of the financial media, it was a year of turmoil, as oil prices plummeted to their lowest level in a decade, China’s fast growing economy took a turn for the worse, and the stock market generated a correction of over 10% from its highs, finishing the year almost where it started.
Maybe one of the reasons the stock market sell-off has garnered so much attention of late is because the financial gurus have forgotten that there is such a thing as a “stock market correction.” Historically, the market has generated a sell-off of 10% or more every eighteen months. This time, it has been almost four years since the last market correction, and serves as a prudent reminder that declines of this magnitude are a regular part of market cycles, and not the exception resulting from specific global events.
On top of that, if it appeared that the market was unusually choppy this past year, it was. Records were broken for the number of days the stock market traded above and below its unchanged level, and the number of times it traded above and below its 50-day moving average.
When looking at world markets and global economies, not through the lens of the financial media, but from the eyes of the billions of people who get up every morning and go to work, one can infer a much different unfolding – except that most of these folks are not focused on world markets and corporate earnings, they are focused on earning a living for their families and selves. Despite the gloom and doom of market prognosticators, collectively, they (we) are doing a pretty darned good job at moving forward in fueling growth around the world.
According to Jeffrey Kleintop, Chief Global Investment Strategist at Charles Schwab, the global economy is on track to experience stronger growth in 2016 than in 2015 or 2014. And, although the growth and future expectation continues to be subdued at around 2%, compared to 3.5% annual growth of the past 50 years, he points out that the direction of economic activity is much more important than its level.
To be sure, there are countries that will continue to struggle with the sharp decline in commodity prices, specifically Brazil and Russia, but collectively, emerging markets around the globe are still expected to grow their economies at a faster clip than their developed counterparts in 2016 and beyond.
And lest the financial media get carried away with China’s stumbling economy and stock market declines, it is important to note that the effect of China on the U.S. economy, from a trading perspective, hovers near 1%, approximately the same exposure of China in a diversified portfolio that includes emerging markets in the mix.
Two years ago, the financial media focused on the tumult of Greece and gold. This year, it is China and oil. Is it possible to assimilate an intelligent investment philosophy without hopping from one country and commodity crisis to the next?
From a planning perspective, an essential component to a successful financial plan is the expected rate of return used to project the future growth of a portfolio. Historically, returns on a diversified 60/40 stock-bond portfolio have generated returns in the neighborhood of 7%.
In light of the expectation of slower growth of world economies, we have already incorporated this into Soundmark’s investment outlook AND financial plans by integrating returns that are below the historical returns generated by stocks and bonds.
This allows us to work together with you to focus, not on the uncertain markets of today, but the wealth planning decisions (saving and spending) that matter most of all in your everyday life.
And despite the pervasive presence of bad news streaming from all media angles, we are as excited as ever about a future that reflects the relentless pursuit of human beings around the world to improve the quality of life for themselves and their communities. We are convinced that this universal good energy has a place in everyone’s portfolio.