The U.S. stock market went for a wild ride in 2015, but the year ultimately went down in history as a trip to nowhere. Despite wavering between record highs and one of the steepest drops in four years, the stock market came to the end of the year essentially flat, producing the weakest performance since the crisis year of 2008. Four factors dogged stocks this past year: a further and unexpected decline in commodity prices, particularly oil; continued strength in the U.S. dollar; soft economic growth and a currency devaluation in China; and a Federal Reserve that, only at its last meeting in December, felt confident enough about the U.S. economy to begin raising interest rates.
The S&P 500 Index recorded a total return of 7.03% during the 4th quarter but ended the year with a meager 1.37% advance. The positive return was mostly attributable to dividends as the price of the Index actually declined by -.74%. The Dow Jones Industrial Average lost almost 400 points in 2015, and, despite the strong 4th quarter performance of 7.70%, returned only .21% including dividends for the year. Russell 2000 Index of small capitalization companies lost -4.41% during last year, and the S&P 400 Mid-Cap Index declined by -2.18%. The NASDAQ Composite Index finally recovered the losses from 2001 “dot-com” bubble burst and finished the year with a 7.11% advance.
Five of the ten sectors of our domestic economy lost ground during the past year. The decline was led by the energy sector which was down over -20%. The information technology, consumer discretionary and health care sectors were among the gainers.
The international markets rose in the fourth quarter but ended the year in the negative territory. The MSCI EFA Index of developed countries declined by -3.30% and the MSCI Emerging Market Index lost -16.96%.
In the fixed income market, the Barclays U.S. Aggregate Bond Index returned 0.55% for the twelve months, and the yield on 10-year U.S. Treasury Note rose slightly from 2.04% in the beginning of the fourth quarter to 2.27% on the last day of 2015.
It would not be an overstatement to say that 2015 was a very, very tough year for making money in the markets. According to Société Générale, the huge French banking conglomerate and a renowned name in market research, last year was the toughest in this regard and the worst year for finding returns since 1937. Many investing hall-of-famers refer to 2015 as “an absolute meat-grinder” and even an investment legend such as Warren Buffett saw his worst year since 2008.
In the last week of December, the Bureau of Economic Analysis released its final estimate for the growth of our domestic economy in the third quarter of 2015. The 2.0% GDP increase was far from the 3.9% expansion during the previous quarter, but in line with the average GDP reading for the last twelve quarters.
The U.S. labor market continued to improve in 2015. By October, the jobless rate was at a 7 ½ year low of 5.0%, and 0.8% below where it was at the end of 2014. Monthly hiring gains over the year ending in October averaged a healthy 230,000. The latest edition of the Labor Department’s Employment Cost Index showed personal wages rising 2.5% in 12 months which was the best yearly advance recorded since the start of the last recession, easing the concerns about stagnant wage growth. Yet, consumer sentiment slipped somewhat during the year and the personal savings rate climbed above 5% as the year went on, suggesting that Americans were putting aside the money saved at the pump.
Few things were watched more closely by investors than the Federal Reserve’s monetary policy. Institutional traders had been predicting since early 2015 that the U.S. Central Bank would begin raising its benchmark interest rate as early as March. When that didn’t happen, investors turned their focus to June, only to be disappointed again. Finally, in December, D-day finally arrived for bond investors as the Fed took action and bumped its benchmark overnight borrowing rate slightly higher recording its first increase in nearly a decade.
The Fed’s move was seen as a vote of confidence in the U.S. economy and an indication that future increases would be gradual. This conservative approach seemed to reassure investors that the Fed wouldn’t raise rates too quickly and possibly restrict the economy’s growth.
Lacking a crystal ball that allows us to predict the future, we can only rely on the assessment of domestic and global economic conditions as a potential guide for projecting future returns. The stock market certainly did not fare well during the first trading days of 2016 when another global selloff, prompted by geopolitical issues, some profit taking, and global growth concerns, sent equities in negative territory. Volatility spiked again, and we expect it to be a major theme for some time as we are starting an election year full of uncertainty both politically and in the markets.
We believe there are some valid reasons for the stocks to regain momentum. Equities are not cheap by any measure and yet are not overly rich, given the long-term valuations. Moreover, in today’s low interest environment, they are definitely cheap relative to bonds.
We are advising our clients to look at any upcoming market volatility and potential pullbacks as short-term bumps on the road to long-term portfolio growth. Patience and discipline are rewarded; emotions, not so much.
Dumont & Blake Investment Advisors, LLC
December 31, 2015