Have We Turned A Corner?

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Previously, (in Should you Worry About Market Declines, and Staying the Course), I advised readers to ignore the news media and recent stock market declines and stick to their long-term investing goals.

This was in response to several client calls worrying about an impending market collapse. After the volatility of the last six months of 2015, and the near 10% losses in the first 6 weeks of 2016, it’s easy to get spooked and yearn for the safety of the sidelines.

But then, as often happens, the markets turned right around and rallied for the past 2 weeks, with nearly all asset classes coming close to erasing the losses for the year.

I guess the stock market really enjoyed the political circus that has been playing out between Donald Trump and all the other 32 presidential candidates!

The strongest gains came from the worst performers of the last year – Emerging Markets, Gold and Oil Companies.

The best performer was Gold (up 9% last week, and 18% for the year), and Gold Mining Stocks (up 5.5% for the week and 35% for the year), but this comes as no surprise.

After several years in a Zero Interest-Rate Environment (ZIRP), we’re now close to a Negative Interest Rate Environment (NIRP). And in negative interest rate environments, gold can be expected to do well.

A third of all global debt (nine trillion dollars worth!) has been issued with a negative yield. This includes the Eurozone, Scandinavian countries, and most recently Japan.

As I mentioned almost exactly a year ago today, the US is going to have a tough time raising interest rates when the yield on newly-issued global bonds is negative. (As a side note, in that letter I also predicted that intermediate-term Municipal Bonds would be the biggest beneficiary – a scenario that actually came true with Munies being one of the best performing asset classes last year!)

Sure enough, as predicted, even though the Federal Reserve increased the short-term rates, the yield on long-term US treasuries declined, and even mortgage rates have dropped to levels not seen since late-2012.

Incidentally, if you’re in a 30-year mortgage with an interest rate that’s over 3.75%, now is a great time to refinance.

Oil prices seem to have stabilized, and may have reached a bottom around $30/barrel, leading to a rally in Oil Companies which were up 9% last week and nearly 4% for the year.

And after 3 years of double-digit losses, Emerging Markets finally seemed to have turned a corner. They were up 9% last week, and up 1.5% year-to-date.

So does this mean the worst is behind us, and its smooth sailing from here?

I doubt it.

I still think we’re going to see a lot of volatility this year, with major declines followed by massive rallies.
But it doesn’t make sense to sell everything and sit on the sidelines.

After all, you don’t earn interest or dividends when you’re on the sidelines. And dividends are responsible for nearly half of your long-term investment returns.

So, as usual, just keep calm and stay invested!

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