On Sunday, Groundhog Day was celebrated in many parts of the United States. It’s an event designed to provide a prediction on the weather in the coming weeks. According to folklore, if a groundhog emerges from its burrow on this day and sees its shadow, then it will retreat back into its burrow and winter will continue for six more weeks. However, if a groundhog emerges from its burrow and doesn’t see its shadow, then spring will come early.
Perhaps Groundhog Day is an appropriate analogy for investors currently at a crossroads and looking for direction. January was a bleak month, as the Dow dropped more than 5% and the S&P 500 dropped nearly 4%. Faced with this loss, investors who examine last month’s returns may get scared and retreat. Or they may stay invested and possibly even add to their exposure to the stock market. What investors do next—either see their “shadows” or not—will have real implications for meeting their long-term goals.
“Many investors believe that they can time the market. Unfortunately, optimal entry and exit points are not clearly marked.”
Here are a few key points for investors to keep in mind as they consider last month’s icy returns:
1. Take the “January Indicator” with a grain of salt.
Developed by Yale Hirsh, the January Indicator predicts stock performance for the year by whether or not stocks produce gains in January, is just that—an indicator, not a rule. There have been a number of years when stocks were down in January but posted positive returns for the year. Investors shouldn’t fixate on this gauge.
2. Timing the market is a fool’s errand.
Many investors believe that they can time the market, for example, moving out of stocks now and returning after the presumed rout is over, when valuations are more attractive. Unfortunately, optimal entry and exit points are not clearly marked. Investors must recognize that moving in and out of the stock market can have a significant negative impact on their portfolio. In fact, Morningstar released a study in 2012 showing that, over the prior 10 years, the average US equity fund returned 1% more on an annualized basis than investors actually experienced due to bad timing.
- 3. Keep contributing and stick with stocks.
The president’s announcement last week of the creation of a myRA account underscores how poorly prepared most Americans are for retirement—they simply don’t have enough money. That’s a combination of not saving enough and not being appropriately and continuously invested in those asset classes, such as stocks, that have historically provided higher returns.
4. Don’t fight the Fed’s “looser for longer” policy.
Last week’s FOMC announcement, while it continued the course of “tiny tapers” for at least the time being, also didn’t change guidance on the federal funds rate. The Fed will likely remain highly accommodative with its overall monetary policy for longer, as it seeks to “stay behind the curve” and support the economy’s growth. That means we remain in an environment of financial repression. Investors with longer-term investment horizons will need exposure to risk assets in order to meet their goals.
Looking ahead, investors should expect more volatility, especially given Friday’s jobs report and the possibility of another debt-ceiling debate. However, investors need to resist the urge to retreat from short-term volatility. Rather, they should embrace the opportunities it creates. The cult classic movie “Groundhog Day” has made the term synonymous with reliving an experience over and over until one learns from it and transcends it. The same is true for investors who repeat the same mistakes again and again. They need to break the pattern by not only being well-diversified, but also by staying invested in the face of fear. Learning that lesson sooner rather than later can make all the difference.
Kristina Hooper, CFP, CAIA, CIMA, ChFC, is US head of investment and client strategies for Allianz Global Investors.She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
Purchasing Managers’ Indexes (PMI) are economic indicators derived from monthly surveys of private sector companies. The Chicago-PMI survey registers manufacturing and non-manufacturing activity in the Chicago region. Investors care about this indicator because the Chicago region somewhat mirrors the nation in its distribution of manufacturing and non-manufacturing activity.
Thomson Reuters/University of Michigan Surveys of Consumers is a consumer confidence index published monthly by the University of Michigan and Thomson Reuters. The index is normalized to have a value of 100 in December 1964. At least 500 telephone interviews are conducted each month of a continental United States sample (Alaska and Hawaii are excluded). Five core questions are asked.
The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.
Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.
A Word About Risk : Equities have tended to be volatile, involve risk to principal and, unlike bonds, do not offer a fixed rate of return. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets.
Allianz Global Investors Distributors LLC, 1633 Broadway, New York NY, 10019-7585, 1-800-926-4456.
AGI-2014-02-03-8900
© Allianz Global Investors
