As we get close to the end of 2015, it is fitting to look back and take a pulse of what happened this year in the markets. The US stock market was especially interesting. As I write this, the S&P 500 is trading just 50 points below where it started on January 1st this year, amounting to a 2.4% loss (does not include dividends). Losses are uncommon, but not rare in the market. In fact, since 1926 the S&P 500 has experienced 24 years with losses, representing 27% of those 89 years. You would think that losses tend to happen when recessions or very adverse conditions show up in the economy. While this is true some of the time, it's not always. This year is a good example. While we are sitting at a small loss today, it makes some sense to take a look at the fundamentals from these underlying stocks in the index (taken from Standard and Poors earnings and estimate report on 12/17/2015):
- Q4 2015 operating earnings are estimated to be 8.5% higher than Q4 2014 operating earnings
- Q4 2015 reported earnings are estimated to be 20.7% higher than Q4 2014 reported earnings
- Q4 2015 annualized dividends are estimated to be 5.3% higher than Q4 2014 dividends
So, earnings and dividends improved, but the market fell. How does that happen? Remember, the market is a forward looking machine. Buyers and sellers don't care what earnings are or were. They only care what they WILL BE. That is why it is so hard to beat the market. Once the estimates start coming out on earnings for the first or second quarter of 2016, the market has priced that data in to the index value. In fact, analysts are already predicting what earnings will be for this time next year (Q4 2016)! Are they going to be right? Probably not, but the current price of the market is probably the best guess out there. Also, realize that millions of people, who have done their research are not only trying to answer the earnings question, but a million others like:
- Where are interest rates going?
- Will there be another terrorist attack and when?
- How is the currency fluctuation in Japan going to impact my Norwegian stock holdings?
- What will the weather patterns look like next year in Brazil?
Some of these may sound silly, but this is the type of analysis that is going on every second by analysts, hedge funds, and wall street investors. I always chuckle when I hear someone tell me that Apple is undervalued, or that low interest rates are causing a bubble in tech stocks. Almost unequivocally, they have no idea (though they don't know what they don't know). They don't realize that there are literally millions of people analyzing all of these outside factors and they have set the price at where it is trading today. When someone believes that price is not right, in reality, he is saying that he/she knows more than the millions of buyers and sellers out there who have set the price. We did a small exercise with jelly beans at a client event that showed how the wisdom of crowds is usually a great way to determine the correct price of the market.
The market looks like it is headed for a flat year. The only silver lining that we can take away is that fundamentals did improve from a year ago. Unfortunately, that tells us nothing about the future.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.