2015 was a year to forget for most investors. It was tough to make money anywhere. Stocks went essentially nowhere, bonds disappointed as well, and commodity prices continued to decline. In fact, a recent article in CNBC said 2015 was the worst year to make money in the last 87 years, because just about every asset class worldwide was in the red for the year.
The fourth quarter started off strong, rebounding from what was a rough third quarter. However, December, which historically has been a pretty good month for the markets, gave back a considerable amount of October’s stellar gains.
US large company stocks, as measured by the S&P 500, had a decent three months, returning 6.4% for the quarter. Unfortunately, that wasn’t enough to push it into a positive territory for the year, and they ended up down 0.7% in 2015. The Dow Jones Industrial Average also experienced negative returns for the year, ending lower by 2.2%. This was the first yearly loss for both the S&P 500 and the Dow since 2008.
While US large company stocks were able to lead the way in the fourth quarter, US small company stocks continued to struggle. Even though they were up 2.6% over the last three months, they posted a 4.4% loss for the year. This loss helped drag many diversified portfolios into negative territory.
International investments contributed to a slight decline to overall portfolio returns. The broad-based EAFE index of companies in developed foreign economies gained 4.3% in the fourth quarter, but finished down 3.3% for the year. Additionally, emerging markets had another tough year. After an up and down quarter, emerging markets, as represented by the EAFE Emerging Market index, lost nearly 17% for the year.
However, there was one lone bright spot in the international markets. Small international companies posted a 5.8% return in the fourth quarter, erasing the losses from the first nine months, and finishing up 5.4% for the year. It was one of the few asset classes worldwide that delivered a positive return in 2015.
Unfortunately, fixed income investments did not fare any better than stocks. International bonds delivered negative returns for the year, while US bonds were largely flat.
Looking over the other investment categories, real estate investments erased third quarter losses, to finish up for the year. Commodities and gold, however, continued to struggle significantly—posting losses of 32% and 10%, respectively, for the year. The further decline in commodity prices can be tied to the surprising continuation of the decline in oil prices as well as slowing growth in China.
With last year in the books, we look ahead to 2016. What will happen? Of course, nobody knows for sure, but the first week of the year was not promising. Markets worldwide plunged in response to China’s continued economic slowdown as they make the difficult conversion from an export-driven economy to a more stable consumer-driven one. At the same time, oil prices have continued tumbling, hitting a fresh 12-year low of $30 a barrel this week. Who would have thought we’d ever see those levels again? It wasn’t that long ago that all the experts agreed that the earth was running out of oil and that oil was headed to $500 a barrel and higher (yet another reason not to take predictions too seriously). Today, some are predicting oil could hit $10 a barrel, a level the world has not seen since the early 1970s. Fifty cent a gallon gas anyone?
Some of the same themes from 2015 will spill over to 2016. Interest rates will most likely be something to keep our eyes on. When will the Federal Reserve make its next move? We expect, like what played out in December, that the Federal Reserve will do its best not to surprise anyone with their moves. They have repeatedly said that it will be a slow, measured rate increase that will be dependent on improving economic data. This should allow both the bond and stock market to digest these increases without too much disruption. However, the recent stock market weakness could push any increases further back to later in the year or even 2017. Stay tuned.
Has anyone noticed that 2016 is going to be a presidential election year? Historically, election years have been kind to the markets, but things are so topsy turvy lately that it’s anyone’s guess if that will turn out to be the case.
Getting back to China, it has become the 800 pound gorilla of the global markets. China’s Shanghai Composite Index lost 43% of its value during a sharp summer selloff, and China’s economic growth has slowed from double-digit growth rates over the past 20 years. As the world’s second biggest economy, it is likely to remain a headline grabber. Although China’s growth rate has slowed considerably, it is still an economy that is growing at a rate of 6-7% a year. That is more than three times the growth of the US!
Then there are likely to be other stories during the year that are not on anyone’s radar—those unexpected events. The most recent of these was the report that North Korea claims it successfully tested a Hydrogen bomb. Who saw that coming? This is not the first time North Korea has tested a nuclear bomb, and the markets have shrugged this off in the past. In the end, it is likely to be a non-story. The point is: investors are faced with these kinds of unforeseen events every year. Financial markets tend to have knee-jerk reactions to these events, but everyone eventually calms down, and maintaining your financial plan in the face of these unexpected events is vital to your long-term investment results.
2015 was the second year in a row where a globally diversified portfolio has essentially gone nowhere, and it is very disappointing, for sure. Both bonds and stocks have had some wild moves both up and down, but find themselves right near where they were at the start of 2014. Mediocre returns for diversified portfolios in 2014 and 2015, particularly after the strong performance post-financial crisis for US large caps, are a reminder that markets are not predictable and that investing requires patience.
In reality, we almost never get “average” returns each year. The portfolio returns we experience in the real world are best described as very “clumpy.” They occur in a seemingly random pattern of up years and down years, rather than a straight consistent path (with some of these years deviating largely from the norm).
Understandably, after streaks like these, investors can start to become impatient. “Should I do something? What is not working? Why do we have that investment in the portfolio?” When we perceive something is not working, we often want change.
These are the times that successful investors separate themselves from the pack. Most investors mistakenly assume that you make all of your money during bull, or rising, markets. The reason so many investors fail is because they make poor decisions when the markets fall. It is one of the hardest things to get right as an investor—sticking to one’s plan, in spite of recent poor returns.
As always, please give us a call or come in to see us if you have any questions or concerns about your accounts, your finances, or the markets. We love speaking to you and being of service!
Happy New Year from Richard, Chris & The DMG Team.