June 29th was a dark day for the markets: Spooked by turmoil in Greece, the Dow Jones and S&P 500 indexes each plunged 2%.
The drop was the sharpest of 2015, but from a historical perspective, it wasn’t all that noteworthy. According to JP Morgan Asset Management, the steepest intra-year declines in the S&P 500 have averaged 14.2% over the past 35 years.
Interestingly, annual returns have been positive in 27 of those 35 years. If you are a long-term investor, this is a key piece of perspective, and we cannot emphasize this enough. History clearly shows that the market tends to swing wildly, yet the majority of the time will come out ahead at the end of the year.
Volatility—those swings in the market—is part of investing. Think of it as the price you pay for earning good returns. But to earn those returns, you have to stay invested, even as others head for the exits.
At least for now, jitters about Greece have eased. The debt-burdened country agreed with its Eurozone creditors earlier this week to a bailout deal that promises to stave off calamity.
But it is a sure bet that market volatility will return before long. Greece’s bailout agreement still needs to be finalized, after all, and things could go awry. Nor is Greece the only country that could rock the boat for investors: , For example, China’s slowing economy may also get the market worked up..
And right here at home, the Federal Reserve is preparing to start raising interest rates for the first time in six years. The rate hikes anticipated to start sometime this year, are actually a good sign: In raising rates, the Fed is signaling that the economy is now strong enough that it no longer needs the crutch of ultra-cheap credit. But don’t be surprised if the markets—bummed out about the beginning of the end of easy money—react with a selloff.
While short-term turbulence is to be expected, we remain decidedly optimistic about the long-term prospects for the economy and the markets. Our outlook is based in part on the fact that interest rates remain low.
Yes, the Fed is poised to start raising rates, but we are starting from 0%–and low inflation gives the Fed latitude to raise them gradually over a longer period. Indeed, that’s just what Fed chair Janet Yellen has suggested that we should expect. Low rates help to buoy the economy as well as the stock market, so this will provide quite a tailwind.
Another factor that bodes well for the markets is the fact that the U.S. dollar is strong. A strong dollar means that capital will continue flowing into the United States, providing another boost for the stock market.
Finally, oil prices are still down about 50% from their high. That translates into lower costs for businesses, which results in higher earnings. Earnings, of course, are a prime part of what moves stock prices.
Drama—Greek and otherwise—is a part of the market. Successful investors tune it out; stay focused on the long term and as the trendy T-shirt says, “Keep Calm and Carry On.”
Bijan Golkar is a Certified Financial Planner™ and licensed tax preparer with FPC Investment Advisory Inc. in the San Francisco Bay Area.