2015 Is A Wrap. What's Next? – Sandi
All that jumping up and down for nothin' should be 2015's tag line. Bonds were flat. U.S. large company stocks were flat. U.S. small company stocks were down. Overseas stock markets were down. Money market earnings were flat. Although 2015 was disappointing, it's important to remember two things. Diversified portfolios had above-average returns in 2012 and 2013. 2015 was the 7th year of a bull market, and the earnings growth hurdle gets higher each year for corporations.
During 2015, stocks rose early in the year, went sideways until August, suffered a 12% correction in the fall, and bounced up late in the year. The last part of December hurt, slamming the S&P 500 of large U.S. companies down to a 1% return for the year. That +1% return was skewed hard by 8 companies (think Facebook, Amazon, Netflix, Google,). Without those, the average large company suffered a -4% loss. Small companies suffered a -4% loss.
Corporate earnings for 2015 are projected to have declined -1%. This would be the first down year since 2008.
WTI Crude Oil Price
The Federal Reserve Bank reversed course after 7 years, and raised short-term interest rates .25 of 1%. While our Fed started raising rates, Europe's central bank kept rates low and applied stimulus. As a consequence, the dollar gained against other currencies, further weakening the overseas earnings of our large U.S. global companies.
A chart of oil shows a price of $90 in January 2014, of $55 in January 2015, and at $30 in January 2016 which is close to its price in early 2009. Energy has long peak to trough to peak cycles.
That's a recap of the major players in 2015. What's next for 2016? Keep your eyes on earnings and interest rates first. Corporate earnings should continue to be healthy, although high growth is not likely. Healthy earnings also assumes no major hiccups.
The Fed has set expectations for 3-4 interest rate hikes, based on continued healthy U.S. economic data. Alex, CFP™ and Senior Advisor at PWFS, adds that "the bond market's reaction to those will be key. It will set not only the return from bonds but it may impact stocks if it's extreme."
Europe may indeed fare better than the U.S. given their central bank's continued stimulus. China may be rocky as their government learns how to better move towards a developed consumer-driven economy. We care because our large U.S. global companies get 12% of their sales from Europe, and 10% from Asia-Pacific (mostly China). Alex III, CFP™ and PWFS's President, warns "a continued global economic slowdown could be a tripping point" in the year.
Jim, our fourth CFP™ at PWFS, points out that "presidential elections can be terrific for a stock market, or send us down in a hurry."
As long-term investors, we've long experienced that diversification can help lower risk and smooth the ups and downs. Using long-tested strategies such as dollar-cost averaging and avoiding high-risk investments helps us construct portfolios that, over the long-run, can help handle volatility better. We hope 2016 will be a modestly positive year for the portfolios.