Market Insights - January 2016
As recently as a few months ago it still seemed likely 2015 would, if not please, at least not disappoint investors. In retrospect, even those modest expectations were overly optimistic. Stocks posted their first negative year since 2008, souring investors' outlook, and grinding away at confidence levels with sharp bouts of volatility.
Markets made good gains throughout the first half of the year, but were blindsided in August and September by China's surprise devaluation of the yuan, followed by staggering losses in the Chinese stock markets, and a sobering revision downward for their growth projections. The influence of the world's second largest economy on our financial markets became crystal clear. Fears of a global slowdown pulled the US stock market down to correction territory mid-year. (see chart next page) Although the market recovered fairly quickly, it never really regained traction, much less investor confidence, and by the end of the year averages were scarcely above water. The AAII investor sentiment index ended the year with 39.4% respondents bearish, only slightly better than when the market was at its worst point of correction this summer.
"Sturm und drang" in energy prices...again
Financial markets were stunned by $55 a barrel oil in 2014. Even with concerns over future growth it would have been hard to predict the further decline to near $36 a barrel by the end of 2015. Saudi geopolitical concerns over the cash windfall for Iran, as Iranian production becomes a factor in international markets, provided a compelling case, despite slackening demand, to keep pumping, driving prices lower. The impact was evident in the energy sector of the S&P 500, which was down 24%.
The S&P 500, our core large US stock category fell .73% for the year, while the Dow lost 2.2%. Smaller stocks were hit even harder; the Russell 200 index dropped 5.7%. International markets in developed countries fell by 1%; however, commodity dependent emerging markets were crushed; the MSCI Emerging Market Index fell by 16%. Positive results were few and far between; real estate, measured by Cohen & Steers Realty Fund, gained 5%, while the Nasdaq Biotechnology index (IBB) gained 11.5%, despite a steep mid-year correction.
Bonds and Fixed income
Fixed income markets were jittery approaching the December Fed policy change, but the debacle predicted by bond market bears never materialized. Interest income, however modest, became a meaningful factor in clients’ portfolios, as intermediate term government and corporate bonds eked out total returns between 1.5% and 2%. High yield bonds, however, were another story. The market was roiled by closure of a Third Avenue bond fund due to illiquid investments; not surprisingly, the entire sector suffered. The Pimco High Yield Bond Fund, (PHYDX) lost 2.21%; the iShares iBoxx High Yield Fund (HYG) fell by 5%.
Earnings must point the way in 2016
While expectations were set low for earnings in 2015, they were not low enough. The S&P 500 aggregate per share earnings posted year-over-year declines for both the second and third quarters of 2015. Though this was mostly driven by the large energy exposure in our markets, it bodes poorly for the final quarter of earnings, soon to be reported. As earnings disappoint, and multiples contract, stock prices follow. Consensus growth forecasts for 2016 S&P 500 earnings are estimated to gain 5-8% from this year’s $118 /share, and markets are trading at roughly 15.7 times the lower end of these estimates. A lot needs to go right for markets to make real headway in 2016, and there are many factors, political, fiscal and monetary, that have disruptive possibilities. Still if the economy grows the way the Fed expects, we may not be disappointed this time next year.
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All of us at TBG would like to thank our clients for their participation in our December Holiday party at Pinckney Hall, for Beaufort County Toys for Tots. We all enjoyed great music, great food and egg nog, and the satisfaction of delivering an enormous assortment of toys to the U.S. Marine volunteers, who distributed them to children throughout the Lowcountry.
We would like to wish all of you a year of good health and prosperity.
Registered Investment Advisor,
The Bedminster Group