The stock market suffered its first correction in more than six years 3Q2015. While economic fundamentals driving stock prices remained positive, the market was long overdue for a correction. At its low point in mid-September, stocks had dropped 13.4%.
In the five years that ended September 30, 2015, the S&P 500 total return was 87% with reinvestment of dividends included. Note that periodic setbacks, like the wrenching correction of late August and early September, are just blips over the long term.
Among the S&P 500’s 10 sectors for the 12 months ending with 3Q2015, investors gravitated toward companies whose earnings come from American consumers. These companies are less exposed to the economic weakness now widely expected in Asia.
The U.S. economy snapped back from the global financial crisis with more strength than other regions of the world, which drove the outperformance of America’s blue-chip companies. It’s a testament to the independence of the U.S economy and helps bolster the case for American exceptionalism.
Outperformance of U.S. stocks seemed frustrating to diversified investors, who own stocks in a broad range of assets classes. But don’t lament not owning more U.S stocks. Being diversified means never performing as well as the best asset class, or as poorly as the worst. It aims for moderation and not extremes.
The red squares show expected earnings on the S&P 500 index based on a October 5 forecast by Wall Street analysts for earnings of $118 per share in 2015 and $130 in 2016. The trajectory of earnings growth is posed to propel stocks higher, unless a crisis or really bad unexpected news sets world progress back.
Past performance of investments is not a very reliable indicator of future performance. Indices and ETFs representing asset classes are unmanaged and not recommendations for any specific investment. Foreign investing involves currency and political risk and foreign-country instability. Bonds offer a fixed rate of return while stocks fluctuate. Estimated bottom-up S&P 500 earnings per share as of June 25, 2015 was $119.06 for 2014 and $133.74 for 2016. Sources: Yardeni Research, Inc. and Thomson Reuters I/B/E/S survey of consensus estimates. Standard and Poor’s for index price data through July 2, 2015; and actual earnings data through December 31, 2014.