The opening days of 2016 were some of the worst-ever for global markets.
Just weeks after the Federal Reserve increased rates by a quarter point, the global markets sold off viciously.
China’s stock market plunged 7% in the first week of the New Year, and trading halted under its new circuit breaker rules.
Oil plummeted to its lowest level in 12 years.
The Dow Jones Industrial Average fell by more than 900 points in the first week -- by far the worst four-day percentage loss to start a year we’ve ever seen, according to data going back as far as 1897.
Investors clearly started the year off in panic mode.
Global fears wiped out a trillion dollars worth of stock market value in the early days of the New Year. George Soros warned that the current situation was much like that of the 2008 financial crisis.
All of a sudden we were knee deep in bear market territory. Doom and gloom once again became all the rage on Wall Street.
But we’ve begun to see some breaks in the clouds.
The last time investors hated stocks this much, it turned out to be one of the greatest times to buy simply because the sell-off was incredibly overdone.
All we have to do is look back at September 2015.
At the time, just 25% of advisors were bullish on the markets at the end of the month. Yet, the S&P 500 jumped 12% between the end of September and early November 2015.
These days, much of the bullishness is because of the recent oil rebound…
In fact, thanks in part to the oil rally, the Dow has moved higher by 11% to 17,223 – a 2016 high in recent weeks. Hopes for a production freeze have prodded oil well off its recent $26.05 low to more than $38.48 a barrel.
But much of that rally is based solely on hope.
We still have a great deal of oil supply to work through before we can really argue for a supply-demand rebalance. We also have to contend with Iran, which is resisting a move to cut production as output soars by the largest monthly amount in 20 years.
But oil hasn’t been the sole reason for the latest rally in the markets.
The Fed rate hike for March 2016 has been taken off the table -- a big relief to markets that feared a second round of sell-offs after December’s rate hike debacle.
Even concerns about China are beginning to die off. In fact, currency stabilization has been another encouraging sign. The yuan, which had been a source of contention of global markets this year, has gained traction in recent weeks. The Chinese government is even moving to support the market with further share purchase when necessary.
Better yet, Chinese investors are hoping for further signs of stimulus from meetings that wrap up on Wednesday afternoon. And there are assurances that China will not need to and does not plan to devalue the yuan any further.
We’re also seeing improvements in the corporate debt market, most notably the high-yield sector. As credit spreads have been contracting in recent weeks, we’ve seen a rise in the price of corporate bonds, too, especially those that are highly speculative.
And then, there’s Europe. European Central Bank president Mario Draghi noted that the bank will review its stimulus program this week because of weaker than expected inflation data and higher economic uncertainties.
Even the FANG stocks (Facebook, Amazon, Netflix, and Google) have been rallying nicely off their lows. Apple too is back above $100 a share.
The good news continues as commodity prices, including gold, have moved up.
Once again, this is proof of how resilient markets are…
When the chaos first broke out this year, some of the top, most respected analysts were advising clients to move to cash or to sell everything.
But as we’ve proven again, that’s been the wrong move.
By selling everything, you missed the rally we’ve enjoyed over the last few weeks.
This is the second time since July that we have seen the Dow Jones Industrials fall significantly, only to recover within a couple of months. The main reason for the quick recovery is that when blue chips become extremely underpriced, investors jump back into the market, snapping up the bargains. That creates a buying frenzy that turns around the market, and that’s why the DJI has recovered so well in 2016.