During 2015 the US stock market posted its worst overall performance since the financial crisis of 2008. That being said, the DJIA decline of (2.23%) and the S&P 500 decline of (.73%) were modest compared to the 40% decline registered during that time. A global commodity drop led by a 30% drop in oil a year following a 50% decline in 2014 is cited as a major reason for the poor performance. The Energy sector was the biggest decliner of the S&P 500 falling (24%) during 2015. The steep drop in oil and commodity prices also spilled over into the bond markets, as energy and miner credits weakened. Much of this year’s gains were concentrated in a small number of primarily consumer discretionary individual stocks. For example, the 50 largest stocks by market cap at the beginning of the year were up an average of 1.5% by year end; while the 50 smallest stocks were down (11.90 %.) Financial stocks disappointed as well, undoubtedly affected by the delayed Federal funds rate increase. 2015 was a challenging year for the US equity markets and in many cases the final S&P 500 Index result did not tell the true story. For example, if you excluded the performance of just Facebook, Amazon, Netflix and Google the S&P 500 would have declined by (4.8%) as opposed to a decline of (-.73%).
As it should, a decline in corporate earnings undoubtedly hindered more robust equity returns. In addition to weak oil, earnings were negatively impacted by the strong US dollar effect on exports, which adversely impacted US company’s both top line sales and bottom line results. Consequently, S&P 500 earnings declined by (14.7%) year over year and by (2.3%) excluding energy earnings. Taking that into account, the US equity prices actually displayed a great deal of resiliency during 2015.
Equity Markets 4th Quarter
Unlike the 4th quarter of 2014, the US market was unable to sustain a 4th quarter rally through the final month of the year. However, the US Broad market still advanced by 6.28% during the 4th quarter, 2015. The NASDAQ market was the best quarterly performer with an 8.39% advance and ended the year positive by 5.73%.
International developed and emerging markets advanced by 4.4% and .27% during the fourth quarter. However, both declined by (-3.3%) and (-16.96%) respectively, during 2015.
The Bond and Credit Markets
The Federal Reserve moved off the 0% line as it finally raised a much telegraphed Federal funds rate by 25 bpts at its final meeting of the year on December 16th.
The 10 year Treasury note and 30 year Treasury bond yields rose slightly and consequently ended the year with yields of 2.27% and 2.97% respectively. Municipal bonds performed well in 2015 and advanced by 1.5% during the 4th quarter. The US Aggregate bond index was largely flat during 2015, declining by (-.32%) on an annual basis, and by (-.56%) during the 4th qtr. The high yield bond market performed poorly during 2015 (-4.01%) as did the global bond market due to weaker foreign currencies (-3.99%).
Alternative & Commodity Update
Many liquid alternative funds, hedge funds and commodity funds performed poorly in 2015 as compared to the broad market indexes as the Federal Reserve raised rates much later than most expected. A steep decline in oil also played a major role in dashing many macro bets as oil declined by even more than most predicted.
Oil and gas limited partnerships registered poor returns as well due to a continued sharp decline in the price of oil primarily due to oversupply. As part of the tax act of 2015 the US lifted bans on the foreign export of oil. This could aid the oil and gas midstream operators in 2016 and beyond.
Oil which began the year at $53.71 declined sharply in the beginning of July and then once again in December, before finally ending the year just above $37 per barrel. The continued slide could spill into the financial sector if energy drillers and exploration companies default on their loans. A now formal deterioration of diplomatic relations and escalation of hostilities between Saudi Arabia and Iran could lift oil prices but worse, could further destabilize an already stressed- out geopolitical landscape including the Middle East and Northern Africa.
Gold and precious metals continued on a downward slide going back to calendar year 2012. Gold, which began the year at $1,183, ended the year at $1,060, posting a significant decline of 10.3%. As of this writing oil had rebounded nearly 10% in the first week of 2016.
As we start the new calendar year, capital markets are poised for more volatility from the very first trading day as China has halted trading following a 7% decline after the release of yet another weak manufacturing report. Consequently, the DJIA declined by over 1,000 points in the first week of 2016 trading as global investors continued to be overly influenced by macro news. Also, the continuation of dueling financial forces may continue to test the markets in 2016. The US is set on a path of raising interest rates while the rest of the world is easing trying to escape recession. The pace of the interest rate increases will pose further consternation for investors. Now that the Fed has finally begun a rate hike path – financial stocks should be primed for better performance than 2015.
Oil will undoubtedly remain a big question mark in predicting 2016 equity returns and is currently seeking a bottom ($33) as of this writing. Fidelity Investments concludes that it may take 24 to 36 months for the world economy to work through an over supplied market.
Ending on an upbeat note, according to Charles Schwab’s Liz Ann Sonders, US stock market history reveals that whenever the S&P 500’s price only return ended the year flat, defined as a return between -2%-+2%, the following year the market’s return was positive by double digits. In relation to bonds, history suggests that a negative year in high yield as was the case 2015, always paves the way for positive performance the following year as well. In January 2015, the DJIA shed 670 points but then bounced back sharply the next month (February) with a gain of 980 points. It is not unfathomable for the same scenario to unfold again.
We wish you and your family good health and fortune in 2016.
Very truly yours,
CRA FINANCIAL LLC