What happened this week?
For the week ending on Friday February 6, 2015 the Dow (DJIA – green/blue line) closed at 17,824.29 (+4.0%), the NASDAQ (orange line) closed at 4,744.40 (+2.75%), and the S&P 500 (red line) closed at 2,055.47 (+3.0%).
Graph courtesy of Fidelity Investments. Feb 2, 2015 to Feb 6, 2015.
Since the beginning of the year, the stock market has taken us on what seems like a rollercoaster ride. I wouldn’t blame you for confusing the YTD graph below with one of the rides at a Six Flags amusement park.
The U.S. stock market ended the week on a positive note and had the biggest gain of the year thus far. The rise and fall of the stock market last week was fueled by several factors including the strong jobs growth reported on Friday, the rising price of oil, and the strengthening dollar. There was a small decline in stock prices on Friday, as the price of gold continued to fall.
What does it mean?
A solid U.S. jobs and wages growth report is an indicator of a strengthening economy, and leads to positive movement in the stock market because of increased investor confidence. Higher wages and lower unemployment mean more money flowing in the economy. A stronger economy will also support higher oil prices, hence the rise of oil futures. There is an inverse relationship between the strength of the dollar and the price of gold. When the dollar strengthens, gold prices fall and when the dollar weakens, the price of gold rises. The reason for this inverse relationship is that gold is used as a safe haven by investors; when the economy is weak and the currency is weak, investors flock to gold, driving the price higher. The strengthening dollar last week led to falling gold prices and stock prices for precious metal companies.
What should you do?
The rise and fall of the stock market is expected. Periods of decline present a “buying opportunity”; an opportunity to accumulate more shares of quality companies or mutual funds. The key is to make sure you are in a position to take advantage of these opportunities when they present themselves.
Budgeting and Dollar Cost Averaging (DCA) are two ways to ensure you are at the right place at the right time, so to speak. With DCA, you invest a set amount of money at a set frequency, regardless of how the stock market is performing. For example, let us say you invest $50/month in mutual fund XYZ. When the stock market is down, your $50 investment goes further because you are able to accumulate more shares of XYZ. In DCA, your focus is on accumulating shares, and remaining disciplined with your chosen investment strategy and allocation.
The second way to take advantage of buying opportunities is to budget an amount of money for investing and accumulate the cash in your investment account. During periods of market downturn, when stocks and mutual funds are “on sale”, you will be in a position to take advantage of the market downturn with a one-time purchase using the cash you accumulated.
Regardless of the method you choose (accumulating shares or accumulating cash), the goal is to plan and think ahead so that when an opportunity presents itself, you are in a position to take advantage of it.