It was the worst of times, it was the best of times...
Sadiq S. Adatia
Opinions as of February 25, 2016
We weren't very far into January when the headlines started to crop up – something along the lines of... "Worst. Year. Ever."
And it's true. The first 10 trading days of 2016 delivered to investors the single worst start-of-year performance for the S&P 500 on record. By the end the month U.S. stocks had recovered somewhat, ending January with a loss of 5.1% excluding dividends. But if you think getting off on the wrong foot means a faceplant will inevitably follow, think again.
This chart shows that even when the U.S. market has gotten off to a rocky start, that's not necessarily an indicator of what the rest of the year will bring.
Chart: Sun Life Global Investments. Data source: Bloomberg. Data accessed February 12, 2016.
Because the bars are taller to the right of the mid-point, it means that more of the 11-month periods following a down January have been positive than negative. In fact, 58% of the time following a negative January, the S&P 500 generated a positive return over the remaining 11 months. And in 73% of those years, the returns were higher than 5%.
Now take a look at 2008 and 2009, the outliers on this chart. After a negative January, the next 11 months of 2008 were brutal. But if you'd thrown in the towel in 2009 after yet another negative January, you'd have missed the strongest 11-month gain of any sample on this chart.
Markets can be fickle when it comes to the follow-up performance to a negative January – but there's clearly a bright side.
So what's all this mean for 2016?
The bottom line is, be ready for anything. Certainly more volatility, and also the possibility that we could have the first negative year for U.S. stocks in 5 years – 8 years if you include dividends. One thing we can say with confidence: history demonstrates that for long-term success, it pays to stay invested no matter what's happening in the markets.
But staying invested doesn't necessarily mean "close your eyes and pray" – certainly not for us. We're constantly on the lookout for opportunities that present themselves specifically during times such as these.
One potential opportunity we're focused on is the energy sector, where we've been taking advantage of lower prices with a three-year time horizon in mind. That said, we do expect oil prices to be significantly higher by the end of 2016.
We expect positive returns in the U.S. this year, so yes – a fulfilment of the pattern shown in the table above. But we expect those returns to be more modest than in recent years, and likely with some significant volatility along the way.
We remain bearish on Canadian stocks in the short term but we do feel most of the damage has been done, and that a rebound in oil this year could provide something of a backstop to the equity market.
Emerging markets is another asset class we're not so favourable toward in the short to medium term. We expect the region as a whole to struggle in part because of slowing growth in China, but we do think some economies will outperform others. India is one country we expect to do well. Expert navigation at a country- and stock-specific level is critical.
Our view toward international equities is more bullish, at least relative to other equity asset classes. We feel the monetary policy conditions in the eurozone and Japan are conducive to further upside, and that the economic and political situation surrounding Greece isn't the wild card it once was (though it likely will be again). In short, we see a positive trajectory for international equities with some hiccups along the way.
We continue to believe domestic bonds are a better place to be than the global bond market. Despite the Bank of Canada's recent decision to hold the line on its policy rate, we still consider it to be a strong possibility the BoC will cut in the next six months. That would likely give Canadian bonds a lift.
From a credit perspective, we're much more positive on high quality investment grade bonds than we are on high yield and emerging market bonds.
In times like these, don't be shy about leaning on your financial advisor. Part of an advisor's job – often a big part – is to provide that steady, disciplined hand on the wheel when your emotions may be threatening to derail you from your long-term goals.
And if you are thinking of getting out of the market – consider how you would answer the question that must logically follow: When will be the right time to get back in?
In the words of famed value investor Peter Lynch as quoted on InvestingRationally.com: "I'm always fully invested. It's a great feeling to be caught with your pants up."
This commentary contains information in summary form, for your convenience, published by Sun Life Global Investments (Canada) Inc. Although this commentary has been prepared from sources believed to be reliable, Sun Life Global Investments (Canada) Inc. cannot guarantee its accuracy or completeness and is intended to provide you with general information and should not be construed as providing specific individual financial, investment, tax, or legal advice. The views expressed are those of the author and not necessarily the opinions of Sun Life Global Investments (Canada) Inc. and/or its affiliates. Please note, any future or forward looking statements contained in this commentary are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated. Please speak with your professional advisors before acting on any information contained in this commentary.
© Sun Life Global Investments (Canada) Inc., 2016. Sun Life Global Investments (Canada) Inc. is a member of the Sun Life Financial group of companies.