In a Nutshell
- 2015 was a tough year for diversified portfolios.
- For U.S. stocks, during the quarter and the year, the story was as much about what to avoid as what to own. Steering clear of energy and basic material companies was as important as being in large company growth stocks. That said, U.S. stocks overall were essentially flat for the year.
- Bonds nervously anticipated the first Fed rate increase in 10 years. When it finally did come, prices fell, but were still buoyed by global demand. Lower quality bonds were negatively impacted by falling energy prices.
- For the year, international stocks of developed markets such as Japan and the Eurozone were flat. Emerging markets, many of which are highly dependent on commodity prices, were the 2nd worst performing asset class last year.
- Commodities continued to take a bath, driven by oil and metals.
U.S. Stocks – Dr. Jekyll and Mr. Hyde
Much like the amiable doctor in the Robert Louis Stevenson novel, in the first half of 2015 domestic stocks were the understated yet dependable members of the investment world. Once the calendar turned to August, however, volatility returned and we saw the first 10% pullback in the S&P 500 since 2011. The comparison to Mr. Hyde is not quite accurate (yet anyway) as the market did not get vicious but returned to its more normal self. The pullback in the third quarter was followed by a rebound of similar magnitude in the 4th quarter.
When dividends are added in, the S&P 500 finished the year up a little over 1%. If we dig a little deeper, we see that as the year went on, leadership narrowed. By October, one of the best places to be was owning a handful of the largest growth stocks such as Alphabet (Google) and Amazon.
Technology and Healthcare stocks also performed well during the 4th quarter and the year as a whole. On the other hand, energy and basic material companies performed poorly during the year and the quarter was no different.
Small and Mid Cap stocks did have positive returns in the last quarter of 2015 but not enough to make up for their summer swoons and so finished the year in the red.
Somewhat troubling over the short term for stocks is corporate earnings have fallen since the second quarter of 2015. Much of the decline in earnings can be attributed to the strong dollar reducing profit margins for exported goods and services. More recently, the dollar has started to weaken relative to foreign currencies. Other measures of the economy such as consumer confidence and employment are also strong. We will have to see if these positives can get companies, and their stocks, back into growth mode.
Bonds – The Fed Finally Moves
The long awaited Fed move finally happened in December as it raised short term interest rates from 0% to 0.25%. The expectation of a rate increase acted as a damper for bonds during most of the year. As discussed in the Q2 review, rising rates act as a headwind for bond values.
With the rate hike, bonds lost a little ground in the fourth quarter. For the year, high quality corporate and government bonds fared best. High yield bonds, which tend to follow the stock market, were the worst performing bond sector for the year, down 5.55%. Part of the loss can be attributed to the aforementioned poor performance of energy and basic material stocks and worries that some of these companies could go bankrupt, defaulting on their debt.
Going into 2016, the Fed had indicated it plans to raise rates 4 more times for a total of another 1% increase (source: Bloomberg). Historically this is a very gradual rise and based on Fed Chair Janet Yellen’s recent comments, may happen even more slowly. Interestingly enough, since the December increase, interest rates for US Treasury bonds have dropped.
International Stocks – Still in the Doldrums
Developed and emerging markets had positive returns in the 4th quarter. Looking over the course of the year, both areas started off with a bang, leading all asset classes. That outperformance didn’t last. Poor growth in China, Japan and the Eurozone along with falling oil and other commodity prices, reversed those early gains and then some. Emerging markets, especially those who depend largely on commodity exports were especially hard hit, losing over 15% during the year.
Longer term, U.S. stocks continue outperforming international stocks. Since October of 2011, the S&P 500 is up 66%, while international developed market stocks are only up 10% and emerging market stocks are down 14%. At some point in the future, this trend will reverse. Until it does, international stocks will continue to be underweighted in our portfolios.
Commodities Continue Their Poor Performance
The combination of a strong dollar, poor demand, and in the case of oil, additional supply, buried any hope of commodities making a rebound in 2015. They started the year in the basement compared to the other major asset classes and then promptly lost ground over the course of the year. Our portfolios continue to avoid them.
Even with the return of volatility to stock markets, gold lost value in the 4th quarter and year as a whole (although so far in 2016 it’s up 13%).
Oil has been garnering most of the attention in the news and at the pump. Historically, low oil prices are a response to lessening demand. In this case, however, demand has been steady. Increased oil production in the U.S. and Middle East in combination with a strong dollar, have driven prices to levels not seen since the last recession in 2008.
With history as their guide, some experts don’t expect oil prices to stay this low for long (source: Wells Capital). Very few companies can make a profit at these levels, currently in the low $30’s.
A number of strategists predict prices to average anywhere from $45 to $65 this year. However, as I’ve stated before, predictions of future asset prices are very difficult. In the case of oil, with geopolitical as well as economic variables, it is all the more so. That said, enjoy your oil dividend while you can!