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The stock market rewarded long-term investors in 2016 – and showed the challenges in trying to time the market.
Within the first two weeks of the year, the S&P 500 index, which tracks the market’s largest companies, lost 8% of its value. Less than a month later, on Feb. 11, the index was down 10% for the year.
Investors’ unease seemed warranted.
Interest rates were expected to rise. Yet economic growth was relatively unimpressive. And oil prices had collapsed, threatening a resurgent sector of the economy.
“You could get scared real quickly,” said Chris Grant of Grant, Koehler & Levin, a money management firm in Mequon.
Few investors expected the S&P 500 index to end the year up 9.5% — and 22% higher than its close on Feb. 11.
Michael Knetter wasn’t one of them.
Knetter, an economist and president and chief executive officer of the Wisconsin Foundation and Alumni Association, which oversees the $2.5 billion endowment of the University of Wisconsin-Madison, thought the market was overreacting in January but expected it to end the year basically flat.
But Knetter, who is a trustee of the Neuberger Berman funds, said that he recently read a quote in the Chicago Tribune from the late Albert O. “Ab” Nicholas, a Milwaukee money manager who died in August, that aptly summed up the year:
“Two-thirds of the time, stocks are going up. One-third of the time, they’re going down. Don’t try to guess which third is which.”
The surprisingly strong year wasn’t limited to the S&P 500.
The Dow Jones Industrial Average posted an even stronger gain for the year of 13.4% — its biggest since 2013. And the Nasdaq market ended the year with a respectable gain of 7.5%.
The 9.5% gain in the S&P 500 — which doesn’t include dividends — was just one of several surprises this year.
Great Britain was expected to vote down a referendum to leave the European Union. When it didn’t, the market reacted sharply — only to bounce back within a few days.
And Donald Trump was expected to lose the presidential election. When he didn’t, the futures market plunged — only to close up the next day.
In the span of 12 hours or so, investors decided that the prospect of lower tax rates, fewer regulations and increased spending on infrastructure from a Trump administration and Republican-controlled Congress stood to benefit corporations.
The market, particularly bank and industrial stocks, continued to rise from there.
The S&P index ended the year up 4.6% from its close on Nov. 8. The Dow Jones Industrial Average did even better. It closed Friday up 7.8% since the election.
What’s the lesson in all this?
“It doesn’t pay to be a forecaster,” said Grant.
Grant has the same take on the stock market as Nicholas. His forecast for how the stock market will perform next year?
“I don’t have the slightest idea,” he said.
Only about half of all households own stocks, either directly or through mutual funds, when retirement accounts are included, according to the most recent survey on consumer finances by the Federal Reserve Board.
But for those who do, a double-digit overall return makes for a banner year.
Just don’t expect it to become the norm.
With the caveat that correctly predicting what the stock market will do is hard if not impossible, Knetter says investors should prepare for long-term returns of 6% to 7% a year.
“It looks like a less forgiving environment,” he said.
For one thing, the U.S. population is aging, with fewer workers to retirees, resulting in a drag on economic growth. Europe and Japan already are seeing the economic effects of the demographic shift.
The stock market also is expensive by historical valuations — though a bit less so given the low returns on bonds and other fixed-income investments.
G. Kevin Spellman, a senior lecturer and director of the investment management certificate program at University of Wisconsin-Milwaukee, said that when expectations are elevated, disappointments are more likely.
Given the high price of many stocks, he said, companies will have to deliver on earnings growth.
That could happen. Business confidence is improving. So, too, is economic growth. But there also are more than a few worries.
Corporate earnings, potential headwinds from a strong dollar, economic growth in foreign markets and the federal debt are concerns cited by Spellman, who has a doctorate in behavioral finance and who worked as a portfolio manager and research analyst.
His biggest worry for the coming year, he said, is negative surprises.
That, of course, is in the short term.
For most people, what may matter more when it comes to building wealth in the stock market is saving money and time.
Both take patience and discipline — traits that don’t come naturally to many and maybe most investors. And Knetter’s standard investment advice may be even harder:
“Try to enjoy a lifestyle that requires less spending,” he said.
How industry sectors fared
The Standard & Poor’s 500 index rose 9.5% overall in 2016, with energy companies and banks posting the largest gains. Here’s a look at how the 11 industry sectors in the index fared for the year:
- Energy: up 23.7%
- Financials: up 20.1%
- Industrials: up 17.85
- Telecommunications: up 16.1%
- Materials: up 14.1%
- Utilities: up 12.2%
- Technology: up 12%
- Consumer discretionary: up 4.3%
- Consumer staples: up 2.6%
- Real estate: up less than 0.1%
- Health care: down 4.4%
Source: Associated Press