Quarterly Market Commentary
Provided by Loring Ward Securities
As of January, 2016
The year ended almost exactly where it started for many asset classes, in particular the S&P 500, which ended down marginally in price from 2,058.9 at the end of 2014 to 2,043.9 at the end of 2015. Similar to 2011, the total return was positive from the dividend yield on the overall index (rather than from any price gain), providing a total return of 1.4% last year. While concerns over the Fed, China, Greece and the price of oil dominated headlines, investors in the U.S. and abroad will barely notice a difference in their year-end statements.
In December the Fed took the long-awaited step of raising interest rates off their near zero level of the last seven years. Markets were up on the date of the announcement, and relatively tranquil in the days leading up to the Fed meeting. A few key points for investors to keep in mind: The Fed hike was highly anticipated, the actual hike was small (25 bps) and the hike occurred because the Fed viewed the economy as healthy.
Despite the Fed raising overnight rates, longer-term interest rates barely budged for the year, with the 10-year U.S. Treasury yield rising just 10 basis points to end the year at 2.27%. While the market is pricing in additional hikes in 2016, they are likely to come slowly and be well telegraphed. As we look back in time, the December event will likely be notable only for the initial liftoff from zero rates.
Commodity prices were the other big story of Q4, with oil continuing to plummet. A mix of decreased demand from countries like China and increased supply from around the globe sent the price of oil down more than 45% in 2015, finishing the year well below $40 a barrel — a mere 18 months away from prices over $100 per barrel. Oil wasn’t alone in its fall; gold, copper and silver all fell by double digits, and commodities as a whole ended the year down by 33%.
Currency played a large role in dampening International returns in 2014 and once again in 2015, with the U.S. dollar increasing against other major currencies by 10.4% on a trade weighted basis. Over the long term we would expect these annual changes to net out to zero. Looking backward we can observe that the present value of the U.S. dollar compared to other currencies is around the same value we saw in the late 1970s — meaning a U.S. investor since that time has not realized any gain or loss from currency changes over the last 40 years.
U.S. Economic Review
Domestic economic data continued to plug along at a healthy, if not exciting, pace. Initial readings for real GDP for Q3 came in at 2.0%, just below the average we’ve seen in this recovery since Q3 of 2009.
The unemployment rate dropped marginally to 5.0% as of November, the lowest level since early 2008. New job creations showed an uptick in October and November to a three-month average of 218,000 net job creations per month. While lower than the rate we were at a year ago, it is still above the 150,000 range needed to reduce unemployment. Real wage growth has been increasing as the year went on; however, it’s still relatively low historically at around 1.8%. Home price gains continued nationally, gaining 5.2% annually over the previous year to October. Historically, home prices have risen at a rate of roughly 1% above inflation, so the current growth rate is faster than historical averages in real terms.
Year over year inflation numbers remain just slightly positive at 0.5%, in part due to the continued drop in oil prices during 2015. If oil stabilizes or increases, inflation could see a meaningful pick up.
Financial Markets Review
During the fourth quarter of the year, investors fared well, with most equity asset classes rising in value. In the U.S., Large Cap, Value and Small stocks saw gains, while REITs lead the pack. International Developed Markets were positive; however, Emerging Markets ended slightly lower. Short term bond indexes declined marginally.
Bonds
Interest rates rose during the quarter, with the 10-Year Treasury yielding 2.27%, an increase of 21 basis points from the end of Q3, but up only 10 basis points from where we started the year.
Domestic Stocks
Domestic stock investors experienced positive returns across the board, with the S&P 500 gaining 7.0%. Long-term returns for the index notched up with the 10-year annualized return now at 7.3% for the S&P 500. For the quarter:
- U.S. Large Cap stocks rose 7.0%, as measured by the S&P 500 Index
- U.S. Large Value stocks gained 5.6%, as measured by the Russell 1000 Value Index
- U.S. Small Cap stocks tacked on 3.6% for the quarter, as measured by the Russell 2000 Index
- U.S. REITs added 7.5% for the quarter, as measured by the Dow Jones U.S. Select REIT Index
For the past 12 months, Value and Small companies trailed by 5% and REITs outperformed by 3% compared to the S&P 500.
International Stocks
Global markets saw continued volatility during the quarter. Developed Markets were led by New Zealand’s return of 18.2% while Canada showed the largest loss, falling 5.1%. Emerging Markets were buoyed by Indonesia gaining 20.8% and sapped by Greece losing 19%. For the quarter:
- International Value stocks rose 2.2% in U.S. dollar terms for the quarter, as measured by the MSCI World Ex. U.S. Value Index (net)
- International Small stocks added 5.8% in U.S. dollar terms, as measured by the MSCI World Ex. U.S. Small Cap Index (net)
- Emerging Markets declined 1.4% for the quarter, as measured by the MSCI Emerging Markets Value Index (net)
For the last 12 months, Developed Market indexes fell 0.8%, International Large Value declined 7.7%, International Small gained 5.5% and Emerging Markets value lost 18.6%.