Remain Calm & Fasten Your Seatbelts

1Q 2016

What a wild ride it’s been in the markets for 2016! It certainly has to be one of the most erratic first-halves to a year in recent memory. But, when markets get volatile they provide opportunities for those who remain disciplined and diversified, and this time has been no different.

Mid-way through February, the S&P 500 was down more than 10% for the year, but managed to stage a significant rebound and close up nearly 1% for the first quarter. The second quarter looked like it might manage a slow grind higher, with the S&P up an additional 3% through June 9th. From there, however, markets began to get jittery as the now infamous “BREXIT” referendum vote approached. Global markets drifted higher and lower with every new poll released forecasting a different result – “remain” or “leave.”

Preceding the vote, the market consensus was that Britain would remain a part of the European Union, causing stock markets to rally for the next week…until the vote came in to “leave.” Stocks fell for the next two days, while investors flocked to safe-haven assets like US government bonds, causing interest rates to drop almost back to their all-time lows. During those two days the S&P 500 fell more than 5% while international developed markets fell nearly 10% – mainly due to large exposure to the EU and UK. Emerging markets held up relatively well, posting a drop of less than 5%.

However, for investors who were able to hold on to their hats, the final three days of the quarter provided a much-needed sigh of relief as stocks recovered a large portion of their losses. The Dow Jones Industrial Average, for example, closed the quarter only about 80 points away from a full recovery from the BREXIT pullback. Including dividends, the major indices finished the second quarter like this: S&P 500 +2.5%; MSCI EAFE (international developed markets) -1.2%; MSCI Emerging Markets +0.8%. This again demonstrates the difficulty in trying to time the markets – investors who sold stocks right after the vote likely didn’t see the following rebound, thus “locking in” their losses.

Lost among all the recent BREXIT volatility, however, lies an interesting fact: that large cap US stocks had almost fully recovered from the “correction” that began in May of 2015. In fact, if you include dividends, the Dow Jones Industrial Average actually did fully recover and set a new all-time high the day before the BREXIT vote. This is a silver lining that most market participants may not yet have noticed. Another is that the US continues to post generally positive economic figures.

BREXIT is the most recent example of confusion tripping up markets. We suspect the EU may remain in the headlines for some time as other nations consider similar votes. Predicting those outcomes will be as difficult as it was with Britain, but thankfully being a good predictor is not a prerequisite to being a good investor.

The famous quote by Peter Lynch sums it up well: “The key to making money in stocks is not to get scared out of them.”