Wall Street 2016: crises and records

Alan Valdes is a broker on the New York Stock Exchange and trading floor director. While stock-trading boards show prices in the green behind him, he recalls many a day in 2016 when shares were in negative territory.

"2016 was a historic year for Wall Street," he told DW. On the first two trading days in the year, the S&P 500 index had tanked by 6 percent, continuing its downward slide until February 11. The oil price had also plummeted, reaching a 10-year low of $25.

"That was the worst start to a new year in three decades," Valdes said. Like many of his colleagues, he had feared that the rest of the year would follow the same pattern that was prevalent in the first two months. There can be no more talk of any losses now. But how exactly did this turnaround come about, despite various terror attacks, the UK's pro-Brexit vote, and the unexpected outcome of the US presidential election?

All these shocks have had something in common - initial panic was followed by market euphoria. New York trader Peter Tuchman (pictured above) said initial slides were more than compensated in the process. CFRA Research analyst Sam Stovall added that investors' shopping spree was as intense as it was rapid.

On average, stocks dropped by an average 3.5 percent after any given shock event - only to recover all losses within 18 days on average, according to Stovall. After the Brexit vote, it took only 15 days to get stocks back to the level they were at before the referendum. Stovall said investors - in a knee-jerk reaction - initially sold many shares after the vote. But after a short period of wait-and-see, they decided that Brexit would not throw the US economy into recession, and they went back into the market with a vengeance.

Irrational investors?

Stovall observed that investors do not always act in a rational way, saying they sometimes behave like hyperactive school kids following the "no one wants to be the last to leave" rule. He said lots of money was taken out of the stock market amid an initial panic among shareholders just because they'd read, say, three similar headlines in newspapers suggesting that would be the right thing to do. Stockbroker Peter Costa agreed that what the media say is often mistaken by investors as based on some real, substantive analysis.

Take the Clinton-Trump election campaigns. Analysts and the media had predicted a victory by Donald Trump would cause havoc in the markets. And just because investors believed it, it became something of a self-fulfilling prophecy on election night. Futures dropped by a whole 900 points. Only after it became clear that Congress and Senate would be dominated by the Republicans did stock values rise again, as investors pinned their hopes on a strong government that would be able to act.

Making a painful break

Alan Valdes sees yet another reason for the return of investors to the market. He says shareholders hate uncertainty. And there was lots of uncertainty before the Brexit vote in the UK and the US presidential election. Once there's a decision, investors tend to put up with it no matter what. Peter Costa agreed: As long as people know the scenario, they can invest accordingly.

After all, the money that shareholders pull out of the market is not really gone. It only gets parked somewhere else for a while. Once the stock market stabilizes, the money goes back in. And with waves composed of millions of herd-following investors doing exactly that, the impact on the market is bound to be huge.

So, if investors have learned to get over market shocks, will there ever be an end to the rally on Wall Street? Oil-producing nations have finally agreed output cuts, which is pushing oil prices up. And this, in turn, is cranking up other sectors. However, analysts warn of the greenback getting too strong and harming exporters. On the other hand, many are banking on Donald Trump's business-friendly policies to foster growth across the US.

What to expect in 2017

Stovall views the bullish market with some unease, noting the current period of rising stocks has been the second-longest since World War II. He says bullish markets are like people - the older they are, the more fragile and unstable they get.

This is why he expects a cooling-off period soon. Alan Valdes also predicts a rather volatile 2017 trading year. Both rely on the market's self-regulating power, saying there's nothing wrong with stock values shedding a few percentage points.