Reviewing 2015 from a financial perspective

Guest Commentary:

When we look back on 2015, from an investment perspective, I don’t think we’ll have a lot of particularly fond memories.

For investors, this past year was difficult, but not disastrous. We may also remember it as the year nothing really worked. The year proved to be a peculiar one. There weren’t any major asset classes that produced particularly attractive returns. U.S. Stocks? No. Global Stocks? No. Emerging Market Stocks? No. Government Bonds? No. Corporate Bonds? No. High Yield Bonds? No. And the list goes on. 

It’s the first time I can recall that all of these major asset classes, which typically aren’t correlated, were remarkably correlated. Volatility returned with a vengeance this year, which made it anything but boring.

I’m ready to turn the page to 2016, but before I do, let’s recap some of the highlights/lowlights of 2015. Several themes that factored in to 2015 will likely have an effect in 2016.

U.S. Market Recap: The DOW finished the year up +.2% (including dividends). This statistically  flat performance figure doesn’t do much to tell the entire story though. There was a huge disparity between market sectors. The top performing sector in 2015 was “consumer discretionary” +10.1%. The worst performing sector (for the second straight year) was “energy” -21.1%! 1 

As you can see, the energy sector continues to wreak havoc in client portfolios. Energy exposure has proven particularly difficult for income investors, because energy stocks play a big role in equity income portfolios.

Fortunately, dividend cuts have been rare and these stocks continue to provide much needed income. Their share prices will eventually start to recover along with the price of oil, but patience will be the key.

World Markets: Not much better here. The MSCI ACWI (All Country World Index) finished 2015 -1.8%. 

Emerging Markets fared worse -14.8% 2. Notable outperformers were Germany +9.6% and China +11.2%. What? Wait a minute. China +11.2%? Hmm… I thought I heard that China’s stock market was one of the causes for the chaos we went through in August and September? I’ll discuss China in more detail shortly.

What about Bonds? Typically bonds do well when stocks do poorly. This is a broad generalization that typically holds true. Last year the bond market turned in a mediocre performance as well. The broad U.S. Bond Index (Barclays Aggregate) had a total return of +.5% and Global Bonds were -3.6% 3. You can begin to see why 2015 seems to be the year that nothing really worked.

Volatility: As I mentioned before, 2015 saw the return of volatility. Here’s a little perspective on the wild year. The DOW started 2015 at 17,823. The DOW hit an all-time high of 18,351 in May. The DOW hit a correction low of 15,370 in late August. And finally, the DOW finished 2015 at 17,425. A wild ride, to say the least! Volatility can have a “silver lining.” Volatility (and lower asset prices) creates a buying opportunity for long-term investors. 401-K participants and other systematic investors benefit from these temporary downturns because they are able to purchase shares of their investments while they are on sale. 

Investors that reinvest dividends may also benefit from reinvesting in more shares at lower prices. Short-term pain, long-term gain!

Correction: 2015 brought us our first intermediate correction since 2012. It appears that we are still likely in correction mode. To review – an intermediate correction is defined as a decline of 10% to 20% from high to low. These corrections typically play out in months, not years. Although corrections are part of a normal market cycle, they are uncomfortable nonetheless.

The Fed: We have lift-off! At the December FOMC meeting, the Federal Reserve Board finally raised the Fed Funds rate from the historic low of .0 - .25%. Ironically, the end of the Fed’s Zero Rate Interest Policy (ZIRP), came seven years to the day after interest rates fell to zero. The Fed Governors voted unanimously on this first rate hike. The hype leading up to the first rate hike was far more dramatic than the actual event.

The bond market took the rate hike in stride and rates were barely affected. The Fed has signaled repeatedly that the rate hike cycle will be slow and low. While interpreting Fedspeak usually is a challenge, the Fed has clearly signaled that this cycle will follow a shallow and deliberate course as monetary policy is gradually normalized. It’s encouraging that the U.S. Economy finally appears to be on a sustainable course. 

Oil: The price of oil continued its spiral in 2015. WTI Crude lost nearly 30% in 2015, following its 46% plunge in 2014. Although the rout in oil prices has hurt energy companies, it’s undoubtedly a windfall for consumers. Any stabilization in energy prices in 2016 could go a long ways in shoring things up.

China: China’s stock market has been in the headlines repeatedly. What I find amusing is that even with all of the doomsday headlines, the Chinese stock market finished 2015 up 11.2%. This follows an astounding 58% increase in 2014.

When China’s market was souring in 2014 the pundits said it didn’t have anything to do with the fundamentals of Chinese economy, and that, the Chinese market was for speculators. Then why do the pundits wring their hands and think China’s economy is collapsing when their market gets volatile?

Something doesn’t add up here to me. My hunch is that the Chinese market is for speculators and that it really has little to do with the fundamental health of the Chinese economy. Granted, China’s growth is slowing, but perhaps it’s slowing to a more sustainable pace.

Moving on to 2016: Many of the issues that plagued us in 2015 have followed us into 2016. The path may remain rocky for a while, but, RBC believes that the global economy should prove resilient. We expect to see heightened volatility in the first half of the year as the markets adjust to a new Fed cycle.

Looking ahead. I’m cautiously optimistic for prospects for investments in 2016. There are virtually no signs that a recession is looming and developed economies continue to strengthen. I’m sure 2016 will have its share of surprises, both good and bad.

Closing: The mediocre results in 2015 made it a difficult, but not disastrous year for investors. This came on the heels of another difficult year, 2014. These long periods of  lackluster returns can be frustrating and fatiguing. During these periods we need to remember that long-term investing is a marathon, not a sprint. With that said, I truly believe that the long-term trend for the market will reward patience and perseverance.

Lastly, this is an election year. This may be a great time to cancel cable until Thanksgiving. Thank you for your continued trust. I look forward to helping you reach your financial goals in the coming year.

John Mee is the branch director of RBC Wealth Management in Spokane, Wash.