As the dust began to settle Friday on a wild week for stocks, financial advisers and market analysts scrambled to make sense of it all.
Despite a two-day run in which the Dow Jones Industrial Average gained more than 700 points, the blue chip benchmark is essentially where it was the day after Thanksgiving, which is the kind of reality advisers and their clients are now facing.
“That is a good example of why it's generally best to resist the temptation to make long-term decisions during periods of short-term volatility,” said John Nersesian, managing director at Nuveen Investments and chairman of the Investment Management Consultants Association. “This kind of volatility is the price we are paying for the opportunity to earn higher returns, and that is what investors are struggling with because they never know which market move is the beginning of something larger.”
Tom Meyer, chief executive of Meyer Capital Group, said that while the market is being propped up by "decent" corporate earnings and low interest rates, investors need to be prepared for volatility like the market experienced this week.
"It seems like every outside event that hits this market hits it hard, sharp and fast," the adviser said. "You better have your seat belt on because people have itchy trigger fingers and they are ready to pull the trigger at any moment."
Although the biggest news might have been the U.S. move to thaw five decades of icy relations with Cuba, most market watchers pegged the Wednesday-Thursday surge to a statement by Federal Reserve Chairwoman Janet Yellen that she and her central bank compatriots would most likely adjust interest rates higher in June.
“The more comfortable the markets are in terms of clarity, the more investors are willing to pay for valuations,” said Mr. Nersesian.
Friday afternoon, the Dow was up another eight points to 17,787. Last week, the average fell nearly 4%, marking its worst weekly point loss since September 2011.
The broad market S&P 500 Index, meanwhile, added 4.5% in the last two days, erasing nearly all of its decline since early December. With another 5-point gain Friday afternoon, the S&P 500 was on track to add more than 3% for its biggest weekly gain in almost two months.
As the Fed pulls the strings and the ripple effects from falling oil prices continue, Theodore Feight, owner of Creative Financial Design, is busy getting while the getting is good.
“The stock market was really oversold over the past week, and it will be interesting to see what happens next year. But I've been bullish since the [November midterm] elections,” he said.
Mr. Feight is bullish on domestic stocks, particularly health care and technology, and he isn't taking any chances of missing the rally.
“I am driving to go pick up checks from clients because I want to get them into the market as soon as possible,” he said.
Mr. Meyer said he is not changing allocations in client portfolios but he did acknowledge that with the price of oil dropping so much, exposure to energy stocks is "a bit worrisome." He added, however, that dividends in that sector, which is often a big reason investors like it, should be safe.
"Financial and technology are our favorite sectors going into next year," he said. "Hopefully, rising rates will benefit fixed income and health care will will present an opportunity."
Because of the timing of the December stock market spike, market pundits have linked the rally to the proverbial Santa Claus rally, but deeper analysis suggests something much more serious and long-lasting is lurking in the background: interest rates.
Bob Rice, managing partner at Tangent Capital, takes a slightly deeper dive into the analysis of the market's reaction to what Ms. Yellen has been repeating in one way or another for more than a year.
“It is hard to overstate how artificial the markets have become and how unhinged the markets have become from fundamentals,” he said. “What's triggering the rally is monetary policy, not anything related to earnings or revenues.”
In making his case, Mr. Rice pointed out that since the 2008 financial crisis, global central bankers have injected $8 trillion into the global economy. For perspective, prior to 2008, “through all of financial history to that point,” Mr. Rice explained, global central bankers had injected just $4 trillion into the marketplace.
“All that money is like an overflowing bathtub, just washing around,” he added. “The central banks are driving the markets and they are reacting to news and to each other.”
The disconnect between the financial markets and market fundamentals also was underscored by Quincy Krosby, market strategist at Prudential Financial Inc.
“Normal markets — without constantly following what the Fed says — have always looked at top-line growth as one of the key barometers of demand, because you can't really fudge it much,” she said. “Our theme is finding out how much of the move up that we've enjoyed was underpinned by central banks; that's what our advisers want to know.”