John Gorlow
| Jan 12, 2016
DO FLAT RETURNS SIGNAL A TURNING POINT?
Apart from a handful of stocks that did very well, global stock markets were in a slump in 2015. Broadly speaking, U.S. stocks as measured by the S&P 500 had their worst annual performance since 2008, returning +1.38% with dividends included. In fact, all the main domestic asset classes, including stocks, bonds and cash, were essentially flat, posting very similar low returns.
Seven of ten S&P industry sectors posted negative returns. Energy was the worst performer, down -23.6%. The top-performing sector was consumer discretionary stocks, which gained +8.4%. Utilities, a big winner in 2014, dropped -8.4% in 2015.
Non-US markets fared poorly as well. Developed stock markets outside the US were off -3% and emerging markets nosedived -15%.
There’s no arguing that the lengthy post-crisis market rally is cooling, and may be over for good. With an eye on current valuations and the narrowing breadth of returns, many pundits are predicting that US stock returns will yield much less in the second half of the decade, perhaps only +4% to +5% on an annualized basis.
Q4 2015 MARKET REVIEW
WORLD ASSET CLASSES: In broad market indices, the US equity market again outperformed both developed ex-US and emerging markets during Q4 2015. The value effect was negative in the US, in developed ex-US, and in emerging markets. Small caps outperformed large caps in both developed ex-US and emerging markets, but underperformed in the US.
US STOCKS: In a turnaround from the previous quarter, the US equity market recorded positive performance in Q4 2015. Small caps (+3.59%) underperformed large caps (+7.04%). Value indices underperformed growth indices across all size ranges.
INTERNATIONAL DEVELOPED STOCKS: Developed markets outside the US underperformed the US equity market but outperformed emerging markets indices. Small caps (+5.82%) outperformed large caps (+3.91%) in non-US developed markets. Value indices (+2.17%) underperformed growth indices (+5.61%) across all size ranges in non-US developed markets.
EMERGING MARKETS STOCKS
Emerging markets indices underperformed developed markets, including the US. Small cap indices (+3.27%) outperformed large cap indices (+0.66%) in emerging markets. Value indices (-1.45%) underperformed growth (+2.66%) indices in emerging markets across all size ranges.
SELECT COUNTRY PERFORMANCE
There was wide dispersion in country returns across both developed and emerging markets countries. New Zealand (+20.69%) recorded the highest country performance in developed markets, while Spain and Canada (-5%) returned the lowest performance for the quarter. In emerging markets, Indonesia (+20.03%) and Hungary posted the highest country returns, while Poland and Greece (-15.31%) posted the lowest. China (+4.84%), which had previously dominated news headlines, recorded one of the highest returns in emerging markets.
REAL ESTATE INVESTMENT TRUSTS
Repeating a strong third quarter, US REITs were one of the best-performing asset classes during Q4 2015, outperforming equities with a gain of +7.54%. In sharp contrast, REITs outside the US gained just +1.86%, underperforming non-US broad equity market indices.
COMMODITIES
Commodities had mostly negative performance in the fourth quarter. The Bloomberg Commodity Index Total Return fell -10.5%. The energy complex again led the decline with heating oil falling -31.1%. WTI crude oil declined -23.4%, while natural gas fell -22.0%. Sugar was the strongest performer with a +18.3% increase. Soybean oil was also among the stronger performers, increasing +10.6%. Overall, the index declined +24.7% during 2015. Cotton was the only commodity to post positive returns for the year.
FIXED INCOME
Interest rates across the US fixed income markets increased in the fourth quarter. The yield on the 5-year Treasury note gained 39 basis points to end the quarter at 1.77%. The yield on the 10-year Treasury note increased 22 bps to 2.27%. The 30-year Treasury bond added 14 bps points to finish with a yield of 3.01%. The short end of the yield curve experienced the largest increase in yields during 2015. Short-term corporate bonds declined 0.14% during the quarter but gained 1.01% for the year. Intermediate-term corporates fell by 0.42% during the quarter but climbed 1.08% in 2015. Short-term municipal bonds returned 0.08% for the quarter and 1.21% for the year. Intermediate-term municipal bonds returned 1.26% for the quarter and 3.28% for the year.
WHAT’S NEXT?
A slowing Chinese economy, collapsing commodity prices, over-heated property markets, a strong dollar, the specter of rising US interest rates, uncertainty over the corporate earnings outlook, and rising geo-political tensions…investors have a full plate of concerns at the moment. Little wonder that we’re seeing increased risk aversion and falling stock prices in the first month of 2016. Perhaps you wonder what you should be doing differently. Our advice remains the same as always: Diversify broadly to minimize investment risks, control costs, maintain balanced, risk-appropriate asset allocation, adhere to a long-term perspective, rebalance periodically, and resist the urge to tweak your portfolio in preparation for events that may or may not occur. The honest truth is that there simply no reliable way to foresee the short-term path of the markets.