U.S.
stocks had their worst annual performance since 2008 closing out a
rocky year. There were only 220 stocks that posted gains while
280 stocks lost ground in the S&P 500. The average stock in the
index was down 4%.
The
energy sector fell 24% while the NASDAQ rose 5.7%. A select cadre of
growth stocks in the consumer, health care and technology sectors
were the shining stars of 2015. Utilities declined 8%, Materials -10%
& Financials -3%.
U.S.
Treasury Government Bond Total Return was + 0.91%.
U.S.
Corporate Bond Total Return was -0.46%.
The
i Shares High Yield Corporate bond ETF fell 10%.
Gold
fell 10% its third year in a row of negative returns.
U.S.
crude oil futures fell 30.47% to $37.04/barrel.
The
dollar gained 11.4% against the euro.
Emerging
market stocks, as measured by the EEM exchange traded fund declined
by 15%.
The January 4, 2016 edition of Investor's
Business Daily published returns for
North Coast Asset Management, a well-respected fund manager based in
Greenwich, CT. Interestingly, each of their approaches : Tactical
Income, Diversified Core, Diversified Growth and Tactical Growth
showed negative returns of -3.8%, -3.5%, -3.8% and -3.5%
respectively.
Such
correlated returns ranging from pure bond portfolios to growth stock
portfolios and balanced stock/bond portfolios are very rare indeed. This
implies that while all boats benefited from a rising tide of printed
money from 2008-2015 Central bankers must now concern themselves with
an ebbing tide in asset prices.
Given
poor returns this past year and the length of the bull market run,
the longest since the 1990's, expectations for the New Year are
muted.
Worries
center around a continued decline in energy prices and the effect on
corporate bond credits. The pace of the recovery in the U.S., Europe,
China and Japan has not only been below past recovery levels but also
below most economists recent expectations.
In
December the U.S. Federal Reserve began a tightening cycle after 10
years of easing and an extraordinary low interest rate policy since
2008.
In
2016, we will have a U.S. Presidential election with the Republican
race wide open.
We
clearly need tax and entitlement reforms to address the doubling of
the deficit since 2009. The Congressional Budget Office has warned the
Social Security $2.8 Trillion trust fund will run out in 13 years.
For
now, the U.S. Economy chugs along at 2.3% GDP levels. Median
household income of $56,700 is among the highest in the world but is
stuck exactly where it was at the end of 2007.
The
poverty rate in the U.S. as of 2014, the last full year where figures
are available was 14.8%. This number is now higher than in 1966 when
President Lyndon B. Johnson began his "War on Poverty".
As
many Americans believe and some politicians state the system is now
broken. Fewer Americans are finding ways to prosper given current
levels of government taxation and regulation and litigation.
Monetary
policy has carried us out of the crisis atmosphere of 2008, but only
new and better fiscal policies aimed at growing the economy can bring
about broader prosperity and profits for the majority of working
people.
Disruptors
like Amazon, Facebook, Netflix and Google have led the market's table
of winners while companies in older industries like industrial,
material, energy and retail are dragging down the averages.
Growth
in corporate revenues, not profits, or dividends has been the winning
ingredient for this past year's selective stock market gains. Overall
SPX profitability slowed in 2015 to $118.12 est. per index share from
the $116.77 calendar 2014 levels. This amounts to a meager 1.1%
profit growth rate.
For
Q 4, 2015 the estimated earnings decline is 4.7%. If there is an
actual decline in Q4, it will mark the first time we have seen three
consecutive quarterly declines since 2009.
In
sum, the market has been in a multi quarter earnings slump. The SPX
has a forward P/E ratio of 16.09 times $127.02 projected 2016
earnings. This represents a 7.5 % earnings growth, year over year. If
the index can reach this earnings level and pay a 2% dividend yield,
a return of 9.5 % is achievable.
China,
Europe and Japan are all still in an easing mode. Additionally, the
largest economies overseas benefit greatly from low energy prices as
well as their two year currency devaluations versus the U.S. dollar.
The IMF has a global growth estimate of 3.1% for 2016.
For
the coming year the balance for the stock and bond markets will be
tipped by global growth levels, a potential leadership change in the
U.S. and the prospects for more or less global conflict.
Corporate
earnings will likely hold up without global recession or interest
rate shocks.
History
shows that after a flat to down market year, U.S. stock markets
normally rebound. We saw such rebounds in 1949, 1971, 1979, 2006 and
2012.
While
we expect a rocky glide path our inclination leans towards higher
stock prices which outperform bonds in 2016.
Doug
Coppola
John
Coppola
January
4, 2016
Communication
is for informational purposes only & doesn't constitute offer to
sell or a solicitation of an offer to purchase any interest in any
investment vehicles managed by CFA or an associated person or entity.
CFA does not accept any responsibility or liability arising from the
use of this communication. No representation is being made that the
information presented is accurate, current or complete, and such
information is at all times subject to change without notice. We do
not provide legal, accounting or tax advice. Any statement regarding
legal, accounting or tax matters was written in connection with the
explanation of the matters described herein & not intended or
written to be relied upon by any person as definitive advice. Any
discussion of U.S. tax matters contained within this communication is
not intended to be used and cannot be used for the purpose of
avoiding penalties that may be imposed under applicable Federal,
state or local tax law or recommending to another party any
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