Stocks move up and down based on supply and demand. Normally, the number of shares of any one stock (supply) is fixed. With the number of shares held constant, the price of a stock goes up when demand increases and the price of the stock goes down when demand decreases. Buyers clearly stepped in this past week as US stocks dramatically increased in value. Most US stock indices are now slightly positive again year to date. Medium size companies, shown below as MidCap 400 have fared best so far this year, and the NASDAQ is currently trailing year to date.
Below you see a one year chart of the S&P 500 which is an index representing the largest 500 stocks in the US. It is clearly locked in a choppy sideways trend. Notice the far right side of the chart where you can see a dramatic selloff starting last Friday as Britain voted to exit the European Union, followed by a dramatic recovery over the last 4 days.
International stocks also gained significantly this week, though the last year has been brutal for most international stocks as you can see from the chart below. Even stocks in the UK as represented by the FTSE 100 and FTSE 250 gained this week.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
I am somewhat surprised by the speed of this recovery and skeptical as to whether it will hold. Historical market shocks often take a few months to repair the damage as noted in the table below.
However, as I penned in last week’s update, I believe the dramatic market selloff following the Brexit vote was an emotional overreaction by markets, especially in the US. US exports to the UK represent a small portion of US GDP.
That said, I believe a recession in the UK is more likely going forward as consumers and businesses contemplate what will happen next. I believe the EU will punish the UK as new trade agreements are hashed because the EU needs to send a message to the remaining 27 countries that an exit is not without consequence. I think a recession in the UK will not necessarily drag the rest of the world into recession and central banks around the world continue to keep interest rates low and provide various measures of liquidity. Will the UK return to the EU? Will other countries exit? It will be interesting to see this unfold over the next 2 years and volatility up and down is normal and should be expected. I think having an experienced financial advisor to help you navigate market cycles and headline shocks can provide value by helping you avoid selling when you should be buying, and avoid buying when you should be selling.
Finally, I believe that what matters most for US stocks going forward is our next few rounds of earnings announcements. Stock prices typically follow corporate earnings and corporate earnings in the US for Q2 are again expected to remain flat or decline with improvement expected in the second half of the year. The decline in earnings is a result of a strong US dollar hurting US exports, and weak oil prices hurting the energy sector. While oil prices are improving and the dollar weakening so far this year, the Brexit vote caused the dollar to spike and this could hold US corporate earnings down.
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