Best of 2015: Equities
Without a doubt, the biggest story in the stock market in 2015 was the fall of oil prices — which of course clobbered energy stocks.
It was approximately 10 years ago, however, that oil not only climbed, but conquered the wall of worry. The rise of China was drilled into every investor’s mind, demonstrating unequivocally that high oil prices were here to stay.
Back in 2005, oil began the year in the low $40s and finished in the low $60s, for an increase of about 50%. Even after oil prices fell sharply during the crisis of 2008, it proved only a temporary setback, as prices rose steadily to over $100 by 2014. Beginning in late 2014 and continuing throughout 2015, oil prices have experienced a dramatic slide. Now at the end of 2015, oil prices have fallen below $40.
The rise of US oil shale production has contributed approximately 4mm bpd to global supply since 2007. Another factor contributing to supply has been the influence of an ongoing proxy war between Saudi Arabia and Iran, whereby the Saudi-led OPEC has maintained high output in the face of falling oil prices so as to keep oil prices low in the hopes of incurring financial damage on Iran and US shale energy producers. The shale oil genie may be out of the bottle, however, as Argentina and China are now trying to create their own shale revolutions.
China’s stock market went for a wild ride in 2015. The government tried to engineer strong stock market performance by encouraging margin loans. As the market soared higher, however, the government cracked down on margin lending. The Shanghai Index fell 40% from its peak.
In the United States, the S&P 500 started the year at roughly 2,060 and is trading at roughly 2,020 as of this writing. In other words, the US stock market has been flat. It has remained in a transitional phase awaiting direction from the US Federal Reserve. Now, of course, it is official: The Fed has announced a hike of the benchmark federal funds rate by 25 basis points (bps). Nevertheless, US margin debt as a percentage of US GDP recently reached an all-time high of 2.87%, which is making some investors a bit queasy.
In Europe, the Stoxx 600 Index has been largely flat in 2015. It began the year at 341 and is presently trading at 357 (representing a gain of under 5%). European stocks appear to be beholden to the European Central Bank (ECB) every bit as much as US markets are to the Fed.
Meanwhile, Japan’s Nikkei Index started the year at 17,702 and is now trading below 19,000 (up about 7%). Back in October 2014, the Bank of Japan (BOJ) announced its plans to purchase bonds on the order of 15% of GDP per year. In November 2015, the BOJ announced that it will keep its purchases of Japanese government bonds (JGBs) steady — so it remains committed to buying a massive amount of securities. What is clear is that the Japanese stock market is rising. What is less clear is whether all this so-called stimulus is actually helping the economy. The country has exhibited anemic growth and recently slipped back into recession. Japan’s Market Cap-to-GDP ratio has risen from about 70% before Abenomics was implemented in mid 2012 to its levels of 139% today. So, rather than making a case for economic stimulus, Abenomics makes a better case for market stimulus.
As if the sluggishness in the developed markets weren’t enough, emerging markets — which had long been the shining star in financial markets — have been suffering even more. The iShares MSCI Emerging Market Index started 2015 at around 39 and is currently trading about 15% lower at rouhgly 33. With the Fed’s decision to start lifting interest rates, the differential in both economic health and monetary policies around the globe should encourage the US dollar to strengthen. And a strong dollar means weakness for emerging markets. The Fed also signaled four .25% increases in interest rates are in store for 2016. So the outlook for emerging markets is problematic.
It seems that the transitional phase that began in late 2014 is now coming to a close. A new chapter has commenced. Although the Fed has proceeded ever so gingerly, the world is nevertheless at a turning point punctuated by the Fed’s historic rate hike. 2016 should see most economies continue to struggle with recession and anemic growth, while the US dollar strengthens and the US market receives considerable foreign inflows of capital. The rest of the world will wrestle with striking a balance between policy and markets.
Wall Street expects the market to deliver 7%–11% in 2016. According to a Reuters poll, the consensus among equity analysts and fund managers is for a modest year from global equity markets in 2016. Even Goldman Sachs warns not to anticipate any gains in 2016. But with these modest expectations, weak economies around the globe, and a rising dollar, maybe – just maybe — all that global capital sloshing around will find a home here in the US stock market? Think about it . . .
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.