2015 Market Review and 2016 Outlook

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2015, What went wrong, what went right, and why?

Domestic Stocks

The S&P 500 had a nearly flat year in 2015.

According to Liz Ann Sonders, Chief Investment Strategist, Charles Schwab, here are some of the reasons for the lack of performance last year;

Market Cap: Bigger was better. The 50 largest stocks at the beginning of 2015 were up an average of 1.5% by year-end; while the 50 smallest stocks were down 11.9%

Dividends: none or lower was better. For income-oriented investors, note that the decile of stocks which started the year with the highest dividend yields were down 14.6%, while the stocks which pay no dividends at all were up 3.9%.

Momentum: 2014’s winners won again. The top six deciles of stocks which did the best in 2014 all averaged gains in 2015. The 50 stocks which did the worst in 2014 were down another 28% in 2015. Buying the losers of 2014 was about as painful as it gets.

FANG stocks ruled. The “fab four” stocks, now nicknamed FANG—for Facebook, Amazon, Netflix and Google (now called Alphabet)—were up over 60% on a cap-weighted basis. Excluding those four stocks, the S&P 500 was down 4.8% last year.

International Stocks

International stocks were positive as a whole with the exception of emerging markets. However, because of our strong dollar their performance was negative.

International Returns
European stocks continue to be supported by more evidence of economic stabilization and improving credit.

Typically, Emerging Market stocks, countries such as Brazil, India, China, and Russia will continue to struggle until commodities stabilize and start to perform better.

Here is how the stock markets fared in 2015;

2015 Stock Returns1

S&P 500 1.38%
Dow Jones 30 0.21%
Russell 2000 -4.41%
Russell 1000 Growth 5.67%
Russell 1000 Value -3.83%
MSCI EAFE -0.39%
MSCI EM -14.60%
NASDAQ 6.96%
Bond Market

If there was a theme to last year it was a lot of noise for little results… The bond markets also had a quiet year.

The 2 year treasury yield rose over the course of 2015, from 0.67 to 1.06 and the 10 year treasury yield rose from 2.17 to 2.27 according to JP Morgan Asset Management.

Tax exempt bonds were the best performers.

Here is a quick glance at the bond markets in 2015;

2015 Bond Returns1

U.S. Aggregate 0.55%
U.S. Corporates -0.68%
Municipals (10yr) 3.76%
High Yield -4.47%
Commodities

If you are looking for the worst performing asset class of 2015 look no further than commodities.

Check out the 2015 levels compared to 20141

Levels
Commodities 12/31/2015 12/31/2014 % Return
Oil (WTI) 37.13 53.49 -30.59%
Gasoline 2.04 2.30 -11.30%
Natural Gas 2.32 3.00 -22.67%
Gold 1,060.00 1,206.00 -12.11%
Commodity Prices 2015

What to Expect in 2016

The main question on everyone’s mind is how much longer can the stock markets continue without a major market correction.  My honest answer; I have NO idea 🙂

In all seriousness, BlackRock performed an interesting study about how the recovery form the financial crisis has been unusually tepid.  The current recovery is tracking the weakest end of range since 1960, in line with other recoveries form past major financial crises.

Take a look;

Business Cycle_Subpar Recovery

I know what you are thinking, that is a great chart Joe, so what?

According to BlackRock this chart suggests the economic recovery in the U.S. could still have legs to run.

Another key important factor if the market is running out of steam is P/E ratio.  What is P/E ratio, to put it simply it is a way to measure if the market or a stock is expensive or cheap. For the more technical definition click here.

While the market is no longer trading at the discounted levels it was the past few years, it is still not expensive either.  We are trading right around the 25 year average.

S&P 500 P_E Ratio

Key Factors to Watch in 2016

Volatility

Volatility is here to stay.  We live in a different market environment than past years.

Volatility

Why is there so much more Volatility in the market these days?

Wall Street is run more than ever by computers and sophisticated algorithm’s that are programmed to buy and sell securities.

Social Media.  It may sound silly but the pace that information becomes available from all different sources, sometime causes a huge overreaction to news.

The popularity of Exchange Traded Funds (ETFs). In the past the “average investor” would purchase mutual funds that only traded once per day, ETFs trade all day long just like stocks.

The Federal Reserve

In December the Federal Reserve delivered its first rate rise in nearly a decade . The central bank unanimously raised short-term interest rates by a quarter of a percentage point and reiterated that the course of policy tightening will be slow and steady from here. Since 2008 the short term interest rate was at zero percent.

Fed Chair Janet Yellen has indicated the Federal Open Market Committee (FOMC) will be moving ahead on the slow cycle. She said “the process of normalizing interest rates is likely to proceed gradually.” Which makes sense because the FOMC also reduced its forecast for core inflation for 2016 to 1.6% from 1.7%.

You can find more information on what to expect in 2016 from the Federal Reserve in our December blog post Liftoff, Finally!

Inflation

While inflation is always a concern, the consensus says inflation should not  be a concern at least for the next few years.  Even though the Federal Reserve is expected to raise short term rates by 1% in 2016. Typically in past rising interest rate environments inflation numbers have risen. The collapse however, in commodity prices, especially oil has changed the long term expectations.

Inflation
U.S. Dollar

It’s been another strong year, up by about 10% in trade-weighted terms since the beginning of the year. The USD is no longer cheap, but central bank policy divergence and further Emerging Markets weakness mean the path of least resistance should be upwards2.

The U.S. Dollar however, could decline if the U.S. economy turns out significantly weaker and prevents the Fed from tightening2.

Dollar
Political Risks

Of course in November there is the U.S. Presidential elections.

Elections always leave investors wanting to wait and see what happens in the election many times before taking action.

According to BlackRock they see the election’s populist overtones, combined with scandals uncovering bad corporate behavior, raising the risk of regulatory backlashes.

Political Risk
Last But Not Least, Global Markets

As every one can see from the first trading week of 2016 Global Markets have a huge impact on the U.S. Domestic Markets.

The consensus is that Europe and Japan look best with the potential for more quantitative easing and high single digit earnings per share growth2.

While Emerging Markets remain the cheapest and best buy from a P/E ratio stand point, the outlook is still negative.  U.S. Dollar strength, falling commodity prices, and the economic slowdown in china are the major reasons for caution2.

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About the Author: Joseph Carbone, Jr.

Joe jr standing up 151 x 100

Joseph A. Carbone, Jr., is a wealth advisor and partner of Focus Planning Group. Joseph is an accomplished wealth advisor with extensive experience in portfolio management/research, financial planning, employee benefits, client relationship management, and insurance design. Joseph holds a bachelor’s degree in finance from Dowling College and obtained the Certified Financial Planner™, Accredited Investment Fiduciary®, and Accredited Asset Management Specialist℠ Designations.
You can contact Joseph via email or social media;
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Research Credit

1Index return data courtesy of JP Morgan Asset Management

2 The Fed Awakens, Russell Investments

Cycles Out of Sync, 2016 Investment Outlook, BlackRock