S&P 500: 1.38% 2015 Return

MSCI EAFE: -0.39% 2015 Return

MSCI EM: -14.6% 2015 Return

US Aggregate Bond: 0.55% 2015 Return

Major Themes for 2015:

1. The Fed Saga Continued – The primary and ever present story in 2015 was the Fed and what/when/how/if they would move on interest rates. Whether watching CNBC, Bloomberg TV, Fox Business, or listening to any financial radio program, they were all talking about the Fed. Frankly it was overblown and I do not wish to write more about it, even though I inevitably will. Similar the strengthening/weakening of currency which I talk about in the next bullet point, the impact of rate moves is overblown.  Historically bull markets have often continued after/during rate hike environments. Rate hikes are not automatically a headwind for stocks, and rate hikes will not stop the bull market alone. Stocks were flat among developed markets in 2015, but the Fed saga was only one of many factors that combined to form those returns. I expect the news coverage in 2016 to continue to revolve around and attribute too much of stock performance to the impact of the Fed.

2. Strong US Dollar Weighed on US Stocks – The strength of the dollar rose throughout 2015. Too many folks exaggerate the impact of strengthening or weakening currencies on the economy and the markets. If we look at recent history (in market terms) the dollar strengthened in the back half of the 1990s and US stocks had historically high performance; US stocks also had high performance 2003-2007 when the dollar weakened. Similar examples can be easily found looking at other countries. When looking at the big US companies and how the impact of the strong dollar on revenues, keep in mind that many firms have foreign-sourced input costs such as: raw materials, labor, and transportation which is cheaper when there is a strong dollar. These savings in effect cancel out the strong dollar impact on overseas revenues. It is true that a US investor that held US stocks did not get the same return as a European investor that held US stocks. There is always some currency risk out there, which is why investors should always diversify globally in their holdings. Blaming the strengthening dollar for US stocks or global stocks lackluster 2015 returns is a stretch.

3. Energy Sector Drastically Underperformed – A year that saw the S&P 500 have flat returns, the energy sector got walloped with -21.4% returns. Oil prices dropped to ultra-low levels, and at this time there is little indication that production or supply relative demand will decrease in the near future. Throughout the year bargain hunters attempted to call bottoms to energy stocks, and were consistently wrong. Inflows into natural resource ETFs among retail investors show that many falsely believe that what goes down must also go back up. The time to buy back into energy stocks will be when the fundamentals change or when sentiment becomes overly negative and out of balance with reality. Investors should not be buying heavily into a stock or category of stocks simply because it has dropped drastically in price, without considering “why” it has performed so poorly. Unfortunately based on fund inflows/outflows investors did just that.

4. China’s Growth Slowed  – A slow down in Chinese economic growth was one of the top stories in 2015. It weighed on the markets, and it weighed on economic growth numbers within the emerging markets category as a whole. I expect this trend of slower Chinese economic growth to continue in 2016. This should not be a surprise to anyone. China is now the world’s largest or second largest economy depending on your method of measurement. It is unrealistic to expect an economy so big to continue to grow in the double digits year after year. More importantly I do not think that there will be a significant difference in the markets if China grows at 6% vs. 9% in 2016. I see both scenarios as bullish for the markets in 2016. A side note, it is exciting to think that slower growth in China is evidence of its economy transitioning from “emerging into developed” territory. This will create an opening for another great economic growth story to be the “next China.”

5. Greek Fears, the Grexit – Greece was a major headline in the first half of 2015. Would Greece exit (Grexit) the Eurozone? Would they accept austerity measures? Would the Greek government default on its debt obligations? Would the Greek government ever meet any deadline that had been set? The list goes on and on. Much of this seemed like deja vu, ah la 2011. All of the excitement added to jitters within the markets. I said all along that the saga playing out in Greece was being overblown. Greece with GDP of around $200 billion, roughly the size of Detroit (which did default in a year US stocks rose 32.4%), is not big or significant enough to trigger a global recession or bear market. As things continued to play out it became more and more clear that Greek troubles would not be contagion with regards to the greater Eurozone. Example: In April at the time of the chaos Greece owed Spain €25 billion, which amounts to only 2% of Spain’s GDP. That was the highest amount owed to any of the Eurozone countries,far from qualifying as contagion. Eventual Greece having no negotiating power, accepted the austerity terms.