As Published in the Winter 2016 Edition of NJ Lifestyle
Volatility was the overall theme of the stock market in 2015, but despite the wild swings to the upside and downside, the market finished roughly flat for the year, posting a price only return of -0.73%. The market finally experienced the “inevitable correction” that investors and analysts had been calling for since mid 2013. In May, the S&P 500 hit an all-time intraday high of 2,134. In August, the S&P fell to an intra-year low of 1867, representing a drop in value of 12.5%. After an initial September rally that faded back to market lows, October rewarded investors with a 13% rally, hitting 2116 in early November, before sliding back to 2043 to end the year.
Oil was one of the biggest headwinds for stocks in 2015. Coming off of a 50% drop in crude oil prices in 2014, crude oil fell another 30% following a relatively stable start for the oil market in the first half of 2015. Lower energy prices are great for consumers, however the energy sector fell approximately 25% and was the worst performing market sector as lower prices took a toll on energy company profits. Master Limited Partnerships (MLPs) fell substantially in value, and the decline in energy prices was felt in the bond market as well. Energy companies are responsible for approximately 15% of the issuance in the high yield bond market. With profits falling due to lower prices, the risk of default for these bonds increased. Although the default risk is largely limited to the energy sector, the entire high yield bond market experienced a widening of spreads and lower prices.
The Federal Reserve finally decided to raise interest rates at their December meeting, raising the Fed Fund rates from 0.25% to 0.50%. The rate hike was anticipated all year, with many expecting a hike to come as early as the first quarter. The delay in raising rates was met with mixed results from the market. The market rejoiced at the idea of lower rates for longer after the initial decision to hold rates steady, but eventually the Fed’s rate hike hesitation was seen as a lack of confidence in the growth of the US economy, sending stocks lower.
Despite the delay in the Federal Reserve rate hike, the US Dollar strengthened by more than 10%. With most of the international community in the midst of easing monetary policy, US interest rates are higher than many of the international developed economies. This interest rate spread makes dollar based investments attractive, causing upward pressure in the dollar. Consequently, a rising dollar lowers the value of corporate profits earned overseas, therefore lowering the overall S&P 500 earnings per share. Since oil is traded in US dollars, a rising dollar put additional downward pressure on the price of oil in 2015.
China was a major story throughout 2015. A slowdown in economic growth in China, coupled with a surprise devaluation of the yuan caused a selloff in the Chinese stock market which carried over to the US markets. A lower yuan makes Chinese goods cheaper to export giving their economy a boost, however trading partners with China will feel a hit as their goods now become more expensive for Chinese consumers to import. A slowdown in China also led to a lower demand forecast for oil, therefore putting additional pressure on oil’s price.
Takeaways from 2015
Many investors may feel frustrated as they see their account values down for the year. Diversification across the global equity markets produced results below that of the S&P 500. US mid cap stocks fell -3.71% with small cap stocks posting a return of -5.71%. The international developed country index dropped -3.30% while emerging markets continued their slide with a -16.96% return. There was also a divergence in returns amongst value and growth stocks, with value performing considerably worse. It is interesting to note that much of the return in the S&P 500 in 2015 was concentrated in a few stocks. If you were to remove the four “FANG stocks,” (Facebook, Amazon, Netflix, and Google) the return of the S&P 500 would have been -4.8%. The S&P 500 is a market cap weighted index, and the performance of the index is therefore influenced more from the larger capitalized companies. With that in mind, the return of the index was flat, while the average stock in the index was down 3.8%. Considering the volatility brought on by plunging commodity prices and fears of a global growth slowdown spurred by China, the markets showed impressive resiliency. A disappointing return in 2015 and increased selling we have seen in early January of 2016 should not deter investors from maintaining their long term asset allocation.
Tom Reynolds, CPA & Matt Reynolds CPA, CFP®
(Co-Managing Partners, CRA Financial)
Francis C. Thomas CPA, PFS (Investment Advisor)
Robert T. Martin, CFA, CFP® (Investment Advisor)
(This article is for informational and educational purposes only and should not be relied upon as the basis for an investment decision. Consult your financial adviser, as well as your tax and/or legal advisers, regarding your personal circumstances before making investment decisions.)