2015 began with the US having just ended its quantitative easing (QE). As we have said in the past, quantitative easing has been a boon for stocks, and without this stimulus stocks struggled last year. After hitting a high in May, the S&P 500 gave back its gains as pessimism pervaded, sparked by events in China. This pessimism led to the first correction in US stocks in over 1,300 days, well beyond the historic norm.
So, after three years of double-digit growth, which has only happened six times in the last 150 years, equity markets paused. Volatility picked up in the second half, but in the end very little was gained in US stocks, bonds, and international stocks. The S&P 500 returned 1.4%, the MSCI EAFE index declined .8%, and bonds were basically flat with intermediate bonds gaining a point, while long-term bonds lost 3.3%. Risk management strategies (i.e. managed futures, global macro, and market neutral) did exactly what they were supposed to do—cushion on the downside, while risk-seeking hedge funds fared poorly.
The US maintained its economic lead in the developed world, with the GDP growing at about 2.2%. This caused the dollar to continue to appreciate against most currencies and created a headwind for US manufacturers who saw their fortunes reverse. Consumer stocks, however, benefited from the dollar’s strength. In addition, technology and health care stocks rallied as well.
The energy sector also struggled this year. After a tough 2014, oil plunged another 30% due to an oversupply problem. (For more on the decline in oil prices, click here to read a previous blog.) Overall, commodities fell to a decade low as global growth waned. Emerging markets, where many economies rely on commodity prices, fell 14.6%.
Needless to say, earnings in the energy sector declined, which kept earnings flat for the entire S&P for the year. The drop in oil prices was also felt in the high yield market. Because a good percentage of the market is in energy, 2015 was the first year with negative returns on high yield bonds—down 5%—without the economy being in recession.
The year saw divergence in central bank policy. As noted earlier, the US had just come off its QE program. The European Central Bank, however, introduced its first QE program as the year began. Japan continued it QE program, and China eventually initiated its own brand of quantitative easing. To further the deviation, as the year closed the Fed Reserve raised rates in the US by 25 basis points.
China was the root of much of the year’s anxiety. After a huge run-up in the Shanghai Index (150% in twelve months), the market plunged, bringing its level back in line with the rest of the world. Unfortunately, most focused on the decline with little regard to the surge. Economic growth has slowed and officially come in at 6.9%—below the 7% target. Real growth is no doubt even lower. (For more on China, click here to read a previous blog). While China has begun its quantitative easing, any benefits could be offset by the ongoing corruption purges. China’s massive anti-corruption campaign is aimed at government officials who have illicitly benefited from the country’s prosperity. The unintended consequence is that it has frightened many of those who have been responsible for the growth, so China’s economy bears watching. While the US dependence on China is limited, China’s economy is now the world’s second largest and capital markets are more intertwined than ever, so uncertainty in China will continue to affect us.
To review, after three good years, 2015 disappointed. Anxiety drove markets and volatility returned. Most asset classes saw slightly positive to negative returns. The dollar continued its strength while oil continued its decline. The US economy remained the developed world’s leader which spurred the Fed to begin tightening, yet much of the globe continued easing.
For a quick recap of 2015 click here to watch our video and to look ahead at the issues facing us in 2016, check back for my next blog.
Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Washington Trust Bank.