A volatile four quarter ended a frustrating 2015 in which the market gave the impression that it was in a tremendous hurry to go nowhere at all. The quarter began promisingly enough. After a punishing third quarter, markets reversed field in October to return to levels near their highs of the spring and summer. Conditions did improve in some respects, as the stock market in Shanghai also reversed its recent slide, oil prices generally stabilized, and Congress passed a spending bill removing the threat of a halt to the Treasury’s borrowing authority. But after October’s welcome gains the market’s tone turned sour. Soft economic indicators, worries about terrorism, foreign and domestic, and continued uncertainty about the prospects for global economic recovery conspired to keep the market from maintaining any kind of momentum. The market had anticipated the quarter’s most significant economic news, the Federal Reserve’s announcement that it would finally raise its target for short-term interest rates above zero, and its reaction to the event was mildly positive. But the year ended with markets drifting lower. The soft market only put a small dent into October’s gains, though, and the S&P 500 returned +7.04% for the quarter. Even after that gain, though, the S&P’s price level was down a bit for the full year. With dividends it eked out a return of +1.38%.
The US equity market’s little strength seemed concentrated in the largest growth stocks: An equal-weighted index of S&P 500 stocks returned +5.04% for the quarter and –2.20% for the year. The Mid-cap 400 index returned +2.60% (4Q15) and -2.18% (2015); and the Small-cap index returned +3.72% (4Q) and –1.97% (2015). Growth also out-performed value by unusually wide margins.[Index returns: Standard and Poors]
As has often happened in recent years, global equity markets tracked the US to a large extent. The MSCI Barra EAFE international equity index rose by +6.34% in local currencies for the quarter. The US dollar strengthened against other currencies. It ended the quarter at $1.0859 to the euro, against $1.1162 at the end of June. It strengthened to $1.4746 against the pound sterling, from $1.5116, and against the yen — to 120.27 yen, from 119.81, during the quarter. The currency effect was a negative for US investors, and EAFE returned +4.71% in US dollars. For the full year, EAFE returned +5.33% in local currencies, but –0.81% in US dollars. [Index returns: MSCI Barra; Exchange rates: Federal Reserve H.10 release]
Unsurprisingly, the Fed’s modest tightening move drove interest rates higher, particularly at the short end of the yield curve. The yield on the two-year US Treasury note ended the year at 1.06%, up from 0.64% three months earlier. The ten-year yield rose more modestly, ending December at 2.27%, compared to 2.05% at the end of September. The Barcap US Aggregate Bond index returned –0.57% for the quarter. It gained just +0.55% for the full year. [Index returns: Barclays Capital; Treasury yields: US Treasury]