Stocks surge in Q4 but fall short for 2015 as Fed hikes rates

Following up on the 3rd quarter's unnerving correction, the first since 2011, was no easy task given the headwinds of the China slowdown concerns, plunging oil prices and the Fed raising interest rates. However, the global markets responded in the fourth quarter as resolved investors scooped up bargains and drove the markets higher, particularly in October, to finish 2015 closer to breakeven for 2015 in what proved to be a challenging year.

The tech-heavy NASDAQ led the 4th quarter rally surging 8.4% to finish 2015 with the top gain of the major markets of 5.7%, and the only one in positive territory. NASDAQ, dominated by large-cap growth stocks, led the markets almost start to finish for the year. The benchmark S&P 500 gained 6.5% in Q4 but finished just shy of a gain for the year at -0.7%. It was the first loss for the S&P 500 since 2008, though if you add dividends back in the streak remains alive with a total return gain of 1.4%. The Dow jumped 7% in the quarter but finished with a loss of 2.2% for the year. Small- and mid-caps stocks, which have led most of the rebound from the financial crisis up until the most recent surge from NASDAQ, had modest gains of 3.2% and 2.2% in Q4, respectively, and finished the year down 5.7% and 3.7%.

Like in many years, it paid to be diversified in 2015, though it may not necessarily feel that way after what seemed like a wash for the year. However, delving into the details there were significant pockets of volatility and large discrepancies in returns from a style perspective and market cap, as noted above. Growth stocks far outpaced value stocks up and down market cap, and if you had exposure to both, as we recommend in our Model Portfolios, your portfolio likely weathered many of the challenges in 2015.

The challenges for the year extended overseas as well, despite the diverging monetary policies being implemented by global central banks. Bifurcated returns were complicated by currency volatility as well. The US dollar rose 2.4% in the 4th quarter and 9% for the year, which hampered un-hedged international stock fund returns. The MSCI-EAFE index gained 4.4% in Q4 but fell 3.3% for the year in US$ terms. In local currency, the MSCI EAFE index gained 3.7% for 2015. The emerging markets were negatively impacted by the year long slide in oil and commodities, tied largely to the concerns about the slowing Chinese economy. The MSCI Emerging Markets index was flat for Q4 but fell 17% for the year. Oil fell 18% in the 4th quarter alone and 31% for the year closing 2015 at $37 per barrel. Commodities fell 9% in Q4 and 23.3% for the year. Emerging markets are heavily export based and in particular commodities.

The Fed and bond market garnered much of investors' attention in 2015. As speculation ebbed and flowed on the Fed's intention to begin normalizing interest rates, so did the bond market and stock market for that matter through out the year. Uneven economic data kept the Fed on the sidelines for most of the year despite repetitive guidance on its intentions. As we've noted, it reminded us of the classic Charlie Brown and Lucy football Peanuts comic strip. Lucy kept reassuring Charlie Brown she would finally let him kick the football but always pulled it away at the last second landing good ol' Chuck on his back yet again. So interest rates traded in a fairly wide band throughout the year with the 10-year Treasury Note yield low of 1.67% and a high of 2.48%. Global market volatility delayed the Fed's first interest rate move since 2008 in September.

However, a couple of strong jobs reports and a Q4 global market rally gave the Fed enough confidence in the US economy to finally raise policy interest rates by 0.25% at its December meeting. It was actually the Fed's first interest rate hike since 2006.

The Outlook

Many of the headwinds of 2015 re-main for 2016; yet, we remain cautiously optimistic emphasizing well-diversified portfolios and a long-term perspective. Volatile markets can whipsaw investors, and we all know that trying to time the market is impossible. We continue to recommend investors stay steadfast with their investment strategies consistent with their risk tolerance. We have updated our Direct Fund and Annuity Allocations for 2016.

China growth concerns and low energy prices to continue

Divergent global central bank monetary policies add to volatility

Market volatility to remain elevated, especially to start the year

Presidential election adds to uncertainty

Stocks remain attractive relative to bonds

Positive but modest return expectations for stocks in mid single-digits

Continue to favor US over foreign financial markets

Fed slowly raises interest rates as intends but possibly less

Interest rates expected to rise in 2016 but remain lower for longer; 10-year T-note yield year-end 2.50%

Economic growth modest again +2.0%

Inflation 1.5-2.0%

We wish you and your family a Happy, Healthy and Prosperous 2016!


Robert O. Nelson