EQM Capital LLC – Year End Review 2015 – No Gain, Much Volatility Pain

Posted on Jan 4, 2016

Bah Humbug!

Stocks traded off the last week of December leaving the S&P 500 Index in slightly negative territory for the year.  The Santa Claus Rally never materialized, delivering instead a disappointing flat lump of coal. The 2015 returns put an end to a string of three consecutive years of solid annual gains, with the S&P 500 and Dow posting their the worst year since 2008.  In fact, except for the NASDAQ, all the major equity benchmarks ended 2015 with a loss.  Bonds also ended up virtually flat for the year, with the yield of the benchmark 10-year Treasury note ending at 2.27%—not far from the 2.17% level where it started 2015.

U.S. Indices
Index % Change YTD
DJIA -2.23%
S&P 500 -0.73%
Nasdaq Composite 5.73%
S&P MidCap 400 -3.35%
Russell 2000 -5.48%

Few gains but lots of volatility

Even though US equity returns ended up flat in 2015, that was not the case for market volatility.  The markets had their share of ups and downs.  Some of the biggest thematic market overhangs were as follows:

  1. Falling oil prices
  2. China’s economic slowdown
  3. The timing of the Fed interest rate hike
  4. The strong US dollar

International markets not a place to hide

Non-US markets had their share of ups and down this year as well.  Europe started off the year with the Greek debt crisis.  A European economic slowdown forced the EU to institute a stimulus plan.  And fears of a broader economic slowdown in emerging markets, in particular China, hit those markets as well.  One bright spot was Japan, who has been on the “Abenomic” stimulus ride for a while.  Japan’s Nikkei 225 Index rallied this year as those initiatives gained traction, finishing up over 9%.

Best and worst sectors of 2015

Consumer discretionary was the best sector in 2015, helped by strong performance from companies like Starbucks (SBUX) and Home Depot (HD).  Technology was another area of sector strength, helping propel the NASDAQ Composite to a positive gain of 5.7% for the year.  The so-called FANG stocks (Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google (GOOGL) were among the best performers for the year.

The worst sector for the year was Energy, as oil prices continued to decline in 2015, hitting a 7-year low in December of below $35 a barrel due to global oversupply. Utilities and financials also ended the year down.

The Fed finally raised rates

Certainly one of the overhangs on the market in 2015 was the timing of the first interest rate hike in nearly a decade.  Speculation built going into the June, September, and December meetings, with the Fed finally raising rates on December 16th, a quarter of a percent.  One factor staving off Fed action was the economic slowdown in China and the ripple effect it has on the emerging markets and the global economy.

Should US economic data remain sufficiently positive, the Fed is expected to make as many as 3 to 5 more rate hikes this year. 

Predictions for the coming year

So what does 2016 have in store for investors?  Market pundits warn that the U.S. markets could be reasonably flat again in 2016.  The good news is not a single Wall Street strategist is predicting a bear market this year (a decline of more than 20%).  The 7-year bull market is aging, but not ready to retire yet.  A poll of 17 Wall Street strategists has predictions ranging from a high of +15.5% (Cannacord Genuity)  to a low of +2.7% (BMO Capital Markets). 

 

How Does This Bull Market Stack Up?
The current bull market has to last for nearly three more years to match the length of the great bull market of the 1990’s
Period Length of Bull Market Total Returnŧ
May 1970 – January 1973 2 Yrs. 8 Mos. 58%
October 1974 – November 1980 6 Yrs. 1 Mo. 198%
August 1982 – August 1987 5 years 266%
December 1987 – July 1990 9 Yrs. 5 Mos. 546%
October 2002 – October 2007 5 years 121%
March 2009 – Today * 6 Yrs. 8 Mos. 257%
* as of 11/6/2015
ŧCumulative return
Source: S&P Dow Jones Indices, Kiplinger.com

 

There will be pockets of opportunity from a stock selection standpoint and in specific sectors of the market.  Given the muted returns here in the U.S., investors should also consider allocating more to select foreign markets.  There are fears that China may have a hard economic landing, the jury is out whether Japan can successfully come out of its economic funk, but Europe is attracting its fair share of bullish interest thanks to Mario Draghi’s “do what it takes” commitment there.

Here’s to a happy and prosperous 2016!

The opinions expressed above should not be construed as investment advice. This article is not tailored to specific investment objectives. Reliance on this information for the purpose of buying the securities to which this information relates may expose a person to significant risk. The information contained in this article is not intended to make any offer, inducement, invitation or commitment to purchase, subscribe to, provide or sell any securities, service or product or to provide any recommendations on which one should rely for financial, securities, investment or other advice or to take any decision. Readers are encouraged to seek individual advice from their personal, financial, legal and other advisers before making any investment or financial decisions or purchasing any financial, securities or investment related service or product. Information provided, whether charts or any other statements regarding market, real estate or other financial information, is obtained from sources, which we and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing in this post should be interpreted to state or imply that past results are an indication of future performance.

1 Source: Reuters, obtained through Yahoo! Finance close as of 4pm ET, as of 12/31/15