Over the last month or so, stock markets have tacked on another 2-3% gain. This rise came on the heels of an abrupt 6% drop in the market immediately after the surprising vote in Britain to leave the European Union. What is going on?
Volatility has returned to the markets in the last year after several years of positive market action, as shown in this five-year chart of the New York Stock Exchange Index. Cited causes of recent market declines include an economic slowdown in China, huge losses in the oil industry, and geopolitical events such as “Brexit.”
Yet why does the stock market keep bouncing back? It appears to be a tug of war between a range of concerns (such as slowing growth and debt problems in China, fear that the European Union will break up, the possibility of rising interest rates, and declining earnings for U.S. companies) and the need for investors worldwide to put their money to work in the best place they can.
Amidst a continuing global economic slowdown, the U.S. looks to many like “the best house in a bad neighborhood.” It is likely that after recent market drops foreign investors jumped in to buy stocks, producing the unusually quick rallies in prices we have seen over the last year.
Despite recent all-time highs for some U.S. stock indices, other indices are still below their peaks of a few years ago. Many stocks have been flat or down for over two years.
Market gyrations aside, stock prices remain very high from an historical perspective leaving scant room for much upside. With this caution in mind we continue to have a lower allocation to stocks than usual and are prepared to move money into stocks as prices become more attractive.
All in all, it has been a modestly positive year for Journey Tree accounts so far in 2016, thanks to strong performance from our roster of closed-end income funds and decent returns from our core stock and bond funds. That said, significant future returns are likely to be hard to come by until stocks get cheaper and interest rates rise again.