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Market Commentary

2015 Year-End Market Commentary and 2016 Investment Outlook – Investor Fatigue

Data source: Bloomberg

4^th Quarter 2015 Highlights

• Global developed market stocks recovered from the 3Q sell-off although 4Q gains were reduced due to December month-end selling pressure. 
• Defying typical year-end seasonal patterns (the so-called Santa Claus rally), global stocks underperformed due to the European Central Bank (ECB) disappointing expectations for aggressive quantitative easing, concerns that the U.S. economy cannot sustain a new U.S. Fed tightening regime, and more evidence of China slowdown affecting global commodities.
• U.S. fixed income was mixed as the intermediate part of the curve (5-10 year) outperformed the short- and long-end while U.S. high yield suffered an from investor outflows related in part to several high profile fund closures (Third Avenue) and a drop in oil prices to the low $30s as OPEC, led by Saudi Arabia, sought to further squeeze the higher cost producers by increasing production.

2015 Year-End Review Highlights

• This was a difficult year for most asset classes.  U.S. stocks, led by the S&P 500, ended slightly positive for the year while ex-U.S. stocks and bonds, in U.S. dollar terms, posted negative returns due to a strengthening U.S. dollar and global growth concerns.  
• Plain vanilla U.S. fixed income was the best performing asset class this year, led by municipal debt and intermediate (5-10 year) Treasuries.  Riskier sectors, notably high yield debt, underperformed this year as many energy borrowers came under financial stress due to the precipitous drop in energy prices. 
• Global commodities and precious metals came under the most pressure this year led by a slowdown in commodity consumption (notably China) resulting in a glut of oversupply.  U.S. REITs turned in a better year of performance as the asset class benefited from robust industry demand and a benign rate environment. 

2015 Year-End Commentary and Capital Markets Outlook Summary Highlights

• Looking back at this past year as we transition into 2016, one could say that investors are experiencing ‘fatigue’ with both lackluster economic growth and lackluster equity market performance. 
• 2015 can be summarized as ‘simple works,’ at least for U.S. investors.  A plain 60/40 mix of U.S. stocks and bonds outperformed more complex strategies that sought diversification through overseas investments and/or non-correlated high absolute return strategies such as hedge funds.
• 2015 can also be characterized by rollercoaster movements that oscillated between expectations for growth normalization to concerns about global growth slowdown and contagion spreading across riskier assets.  Markets have become ‘fragile’ where the structure may look fine on the surface but is hiding many cracks forming underneath.
• Heading into 2015, U.S. equities trade near their cycle-high valuations while U.S. bond yields, although unchanged from the beginning of the year, continue to signal deflationary concerns from a global growth slowdown and a rate hike regime started by the Federal Reserve in December.  Ultimately, both cannot be right.
• The uncertainty expressed by stock and bond market pricing has led to a Noah’s Ark effect of investors running to safer ground by piling into a narrow group of assets.  A new ‘nifty-50’ regime drove narrow market performance in 2015. A handful of high multiple, growth stocks in consumer and health care helped push broad market indices to positive levels.  Safe municipal bonds and intermediate Treasuries also posted positive returns.  Yet many assets outside of these safe haven areas performed poorly. 
• 2015 turned out to be a better year for certain strategic or alternative beta (factor investing) as trend-following factors such as price momentum and more defensive factors such as quality posted positive returns.  On the other hand, factors focused on value and dividend investing ended up negative for the year.
• How one positions themselves heading into 2016 largely depends on what macroeconomic forces and central-bank policies prevail. Will the Fed’s rate hikes ultimately engineer a ‘policy’ failure as the world’s growing debt burden makes it increasingly susceptible to rate increases?  Will a continued slowdown in China and broader Pan-Asia spill over into global? Can Saudi Arabia squeeze out non-OPEC producers?  Can ex-U.S. central bank policy overcome the deflationary implications of a global oversupply of commodities and manufacturing capacity?
• If investors have grown weary of central bank policy statements driving market behavior, they won’t get much respite in 2016.  All eyes will be on Fed policymakers as they embark on a rate hike regime following seven years of zero interest rates.  We expect energy and the Fed to drive much of the 2016 market behavior as they had in 2015.
• For this coming year, we are starting to focus on where ‘value’ resides, whether by region (developed, emerging markets), by risk premia (momentum, quality), or by sub-asset class (fixed income credit, duration). Investors may be growing tired of the uncertainty weighing on the markets, but that should not preclude them from allocating capital to areas where they believe they are best compensated for the risks involved. 

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To view supplemental 4Q2015 and CY 2015 charts, click here.