Stock market action in January 2016 struck fear into the hearts of bullish investors. Violent down moves (tied to the oil crash and China’s slowing economy) can erode the confidence of any long-term investor. On January 20, 2016, the S&P 500 hit an intraday low of 1812, which was a 12.6% correction from the recent high of 2073 on December 16, 2015 after the U.S. Federal Reserve (Fed) announced its first rate hike. In addition, the 1812 value was a 15.1% correction from the all-time S&P 500 Index intraday high of 2135 reached on May 20, 2015.
Despite a 2.5% rebound to an S&P 500 level of 1940 on the last day of January, we believe volatility will continue. In fact, in our opinion it would be a healthier stock market if the S&P 500 retested the low 1800’s again.
Our Cautions and Warnings
During 2015, we predicted 3 times that a market correction could occur, and as a result we recommended cautious approaches to the overall market. Here is what we said on:
- November 2, 2015 – “With the overall U.S. stock market nearing full valuation, caution in committing new capital may be in order.”
- October 4, 2015 – “We remain cautious that the S&P 500 may still test the 1800’s.” (Note: the S&P 500 was at 1951 on October 2, 2015 and dropped to 1812, intraday low on January 20, 2016).
- August 2, 2015 – “A rebound in energy prices and/or weaker dollar may be what our markets need” (to rally).
Despite these cautious views in 2015, we also believed that investors can still do well by selectively buying stocks of companies that can make excellent profits in this economic environment. In fact, our IBSS Stock Picks™, which focus on “fun” stocks, gained an average 18.6% while the S&P 500 lost 0.7% in 2015.
Where Do We Go From Here?
2016 may turn out to be a very bad investment year if U.S. and/or global recession trends take hold. On the other hand, some economic data is showing great resiliency, and if the oil over-supply/cheap price scenario gets resolved, we could rally into the later part of 2016 (perhaps after the U.S. Presidential elections in early November). In any case, the S&P 500 will likely bounce between 1800 and 2000 for most of the year unless some major negative catalyst drives stocks lower, or a very positive catalyst fuels a significant rally. While China’s economy and global oil prices are key elements watched by most market experts, we are also concerned that the U.S. economy could weaken further if U.S. consumers continue to show more desire to increase their savings rather than their spending.
As a method to manage investment risk better, we suggest that investors maintain a 20-25% cash position until such time that investment prospects look more positive. Or, you can invest some of this cash by taking advantage of lower stock prices to slowly accumulate stocks in quality companies (i.e., from our IBSS Stock Picks™ and/or Fun Stocks Watchlist™) at better values.
Investors with employer retirement accounts (e.g., 401k/403b) should continue their dollar-cost averaging investing without any interruption.