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Here’s Why the Market Has Been Going Nowhere Fast

This year our 401(k)s have been on a one-way ride to nowhere.

If you recall, 2016 started out with the market in free fall. The Dow Jones Industrial Average suffered its worst-ever start to a year since they started keeping records. . .in 1897! But the index, after bottoming in mid-February at 15,500, came roaring back, climbing back near 18,200.

Then it slid again. On Friday, the Dow settled at 17,500 down about 0.5% from were it started 2016. In other words, the Dow has pretty much gone nowhere so far this year, continuing the market’s pattern from 2015.

A wild ride, signifying what. . .exactly?

Analyzing the market is always a bit of a Rorschach test: Bulls will claim the market is digesting the huge gains from the 2009 lows to the highs of May 2015, and that stocks still remain attractive relative to Treasuries. Bears claim the sideways pattern for the past 18 months is a sign of fatigue and signals the end of the bull market. The stark pattern of declining S&P 500 earnings per share—despite massive corporate buybacks—means the stock market is even more expensive on a valuation basis, particularly on a cyclically adjusted price-to-earnings (CAPE) ratio.

As with the market itself, sentiment has swung wildly this year over some big issues, including:

  • The Fed: The year started with fear that the Fed would be aggressive in raising rates, then shifted after Janet Yellen made some dovish comments in late March and early April. More recently, focus has shifted back to ‘fear of the Fed’ after minutes of the FOMC’s April meeting declared: “Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter. . .then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June.”
  • China: The world’s second-largest economy looked like it was heading over a cliff when 2016 started but then produced some not-as-bad-as-feared economic data. That, however, is once again stoking concerns that a credit bubble in the world’s second-largest economy could be masking the real health of China’s economy. George Soros, for instance, says China is like the US circa 2007.
  • The dollar: Everyone loved the greenback at the start of 2016 before it suffered its worst quarter since 2010. But just as sentiment had shifted away from the greenback, the dollar has more recently regained its muscularity.

One of the few constants this year has been strength in gold, which is up about 18% so far this year, and saw a huge spike in demand in the first quarter, according to the World Gold Council. Stocks of gold miners like Newmont Mining (NEM) have also been big winners so far this year, after lagging the market for several years.

Gold, though, has cooled more recently, due to the renewed focus on potential Fed rate hikes and resulting strength in the dollar. Thanks, nowhere market.

What’s up with that? Gold, as reported here in February, is rising not so much because people fear inflation but because of the global trend toward negative rates. Negative rates mean people and institutions are paying the banks to hold their cash, or paying governments to invest in their bonds. Rationally speaking, if it’s costing you money to keep cash in the bank, why not invest in something like gold that has an opportunity to provide a return on investment?

Depending on your level of risk tolerance, gold should be anywhere between 2% and 10% of your portfolio—if it’s much more than that after this recent rally, I recommend trimming some of your positions because the one big lesson of recent market history is that (with apologies to Axl Rose):

Nothin’ lasts forever…
And we both know hearts can change…
And it’s hard to hold a candle…
In the cold rains of May, that often felt like November on Wall Street

Related: Where to Invest Now

Some of the other highlights of the first part of 2016:

  • Pity the Investment Banker: A number of huge mergers were called off because of regulatory or shareholder opposition, including: Allergan-Pfizer, Baker Huger-Halliburton, Canadian Pacific Railway-Norfolk Southern, Honeywell-United Technologies, and Office Depot-Staples. Nearly $500 billion in mergers have been canceled so far in 2016, which are a lot of M&A fees gone by the wayside.
  • Earnings Miss: First quarter S&P 500 earnings were the worst since the financial crisis, reviving concerns about the state of the global economy as well as equity valuations. Still, the roughly 6% decline wasn’t as bad as originally anticipated and analysts remain (ever) hopeful for a rebound in the second half of 2016.
  • Big Buybacks: Share repurchases are 20% higher in the first three months of the year versus the fourth quarter and 31% above the year-ago period. What’s more, the group of companies doing the most buybacks was pretty diverse. Some of the most aggressive buyers of their own stock were Apple (AAPL), General Electric (GE), McDonald’s (MCD) and Boeing (BA). On the other hand, ExxonMobil (XOM) has sharply retreated, cutting back on its share repurchases following the hit the energy industry has taken from falling oil prices.
  • Unicorns Crash: As valuations for number of high-profile startups tumbled, Theranos and Zenefits faced challenges to their very existence. Among public companies, Valeant Pharmaceuticals (VRX) and Lending Club (LC) also faced existential crises. That has put a damper on investors’ animal spirits, one more factor in the market’s lackluster start to 2016.