Despite a strong rally in the fourth quarter, 2015 will go down in the books as a difficult one for investors. A fourth quarter surge of over 7% let the S&P 500 end the year with a small gain of 1.4%. Despite the modest gains in large-cap stocks, smaller stocks struggled, ending the year down 4.4%. Markets in other parts of the world were not so fortunate. Emerging market stocks were down almost 15% in 2015. Developed markets outside of the US, as measured by the MSCI EAFE Index, were down 0.8% for the year. One bright spot in global equity markets was Japan, which saw equity markets rise over 9% in 2015 in dollar terms.
From a sector perspective in the U.S., four of the ten sectors that make up the S&P 500 increased over 3.5% during 2015, while every other sector declined for the year. Some sectors, such as energy and materials, experienced double digit losses. There was also significant divergence in the performance of growth stocks versus value stocks. U.S. growth stocks returned 5.7% while value stocks returned -3.8%. The number of companies contributing to positive market performance declined at a rapid clip in 2015. Gauges of market breadth were at very low levels in 2015, similar to the late 1990’s when a handful of high-flying technology stocks drove the performance of major stock market indices. To illustrate the lack of market breadth in 2015, the performance of the S&P 500, which is skewed towards mega cap companies, would have been 3% lower if not for the performance of eight stocks. These companies include well-known names such as Amazon, Microsoft, Google, and Facebook. On the other hand, if an investor had invested in a portfolio of equally-weighted S&P stocks, their return would have been –4.1%.
2015 was also a difficult year in commodity markets. Crude oil, the world’s most important commodity, fell almost 35% to an 11-year low. Across the entire commodity complex prices were down, with the Bloomberg Commodity Index falling almost 25%, its fifth straight year of declines.
After several years of feints and false starts, the Federal Reserve raised interest rates in December for the first time in almost ten years. Despite this move by policymakers, the 10-Year Treasury Bond, which started the year yielding 2.12%, ended the year yielding only 2.27%. During the year the 10-Year Treasury traded at a low of 1.68% in late January and a high of 2.44% in July before ending the year only marginally higher than it started. High yield bonds, impacted mainly by distress in the energy sector, traded off dramatically in 2015, losing over 4.6%, the worst performance in the high yield market since 2008. Despite the slight increase in rates and widening credit spreads, the Barclays US Aggregate Bond Index was still able to squeeze out a positive return of 0.55% for the year. Municipal bonds did significantly better, returning 2.43%, providing a bright spot for diversified portfolios.