Stocks were little changed on Friday morning as the markets reacted to mixed signals from the U.S. economy. Most major market benchmarks were up just a fraction of a percentage point as of 11 a.m. EDT, with stocks failing to rally after several days of declines due to sluggish growth in U.S. gross domestic product and a slip in consumer sentiment. The Dow Jones Industrials (DJINDICES:^DJI) are down slightly so far in 2015, while the S&P 500 (SNPINDEX:^GSPC) is holding onto the tiniest of year-to-date gains. Yet amid all the uncertainty, there are a few useful lessons investors can learn from the market's moves this year.
1. Investors' views of the market are getting whipsawed.
One danger of a volatile market is that it's easy to change your mind from day to day based on stock movements. When stocks plunge, you tend to focus on bad news affecting the market, but when they bounce back you look at the rosier aspects of stocks' performance.
Figures from the American Association of Individual Investors' Sentiment Survey show just how quickly investors are changing their minds, with its weekly polls reporting moves of 5 percentage points or more on bullish or bearish readings in 11 of the 13 surveys in 2015. Even with the most recent survey showing an 11-point jump in bullish sentiment, optimism levels remain below where they stood at the beginning of the year, and those with neutral views remain at unusually high levels.
Your best response to these conditions is to recognize that they exist and do your best to avoid changing long-term view in response. It can be hard to ignore what seem to be compelling news items, but do your best to put them into a bigger-picture perspective rather than allowing them to provoke a knee-jerk reaction.
2. Markets still aren't ready for higher interest rates.
A couple years ago, most investors expected that short-term interest rates would be rising by now. Yet as the Federal Reserve's recent pronouncements have indicated, investors are clinging to any last chance of forestalling rising rates, focusing not on the central bank's removal of "patience" language in its latest reading of monetary policy but rather on the perception that the Fed believe the economy is weaker than many thought.
The Fed has done its best to convey the idea that when rates rise, they'll likely climb more slowly than usual and not go as high as they have in the past. Still, longer-term interest rates reflect very conservative expectations for Fed rate hikes, and the pockets of the market that tend to be more sensitive to interest rate moves have seen only minimal declines in anticipation of future developments. That raises the potential for more abrupt market shocks when the Fed does move, making it essential to prepare your portfolio now rather than counting on having advance warning.
3. Flat markets don't mean flat sector performance.
With little change in big stock indexes, you might think most stocks have been quiet. But pockets of strong and weak performance belie the apparent calm in financial markets.
Looking at sectors of the market, healthcare stocks have soared 8% so far in 2015. Consumer discretionary stocks have also performed well, indicating how strong consumer spending has been lately as employment conditions improve and falling gas prices add more discretionary income to people's wallets. On the other side of the coin, energy and utility stocks have fallen, with oil prices and other macroeconomic factors largely to blame.
It's important to look beyond the Dow and the S&P 500 in evaluating your investments, because some industries are enjoying better or worse conditions than the market as a whole. Only comparing your results with the right standard will offer a good sense of how you're doing.
Three months is too short a period to judge long-term market performance. But with investors looking for signs of what's to come after six years of a strong bull-market rally, taking heed of these three insights could help you position your portfolio for whatever the future will bring.