After a turbulent 3rd quarter, markets rebounded in the 4th quarter. For the year, the S&P 500 index was down 0.7% to 2044. The Dow Jones Industrial Average was down 2.3% for the year, closing at 17,245. Technology stocks fared better with the NASDAQ Composite Index up 5.2% to 5,007. In fact, some of the best performing stocks were the so-called FANG stocks with Facebook up 34%, Amazon up 118%, Netflix up 134% and Google (Alphabet) up 47%. International stocks also struggled in 2015 with the MSCI ACWI ex-US (all country world index excluding US) down 5.7%. Emerging markets had a terrible year, down over 16%. Many international markets were up in local currency but, due to the appreciation of the dollar, were down when translated into dollars.
On December 16, the Federal Reserve increased interest rates by 0.25%. This was the first rate increase since July 2006, before the 2008 financial crisis. Shorter-term bonds showed larger increases in yields than long-term bonds, resulting in the yield curve flattening out. The yield on the benchmark 10-year U.S. Treasury rose slightly from 2.20% to 2.27%.
The US government actually passed a budget funding the government through September 30, 2016. This removed the risk of a government shutdown before then. The tax bill made a number of credits and deductions permanent, including the $2,500 American Opportunity Tax Credit (for education), deductibility of state and local sales taxes in lieu of a deduction of state and local income taxes, and Qualified Charitable Distributions from IRAs (for individuals over 70 ½ years old). The law also extended energy credits through 2021 as well as postponing the Obamacare Cadillac tax on employer provided healthcare until 2020.
The US economy continued to grow in the 4th quarter, albeit at a slower rate with GDP projected to increase < 1%. Unemployment remains low at 5%. Inflation for 2015 should come in at < 1%, with falling oil prices exerting downward pressure. Oil prices were one of the big stories for the year. Prices declined from about $60 per barrel to around $35 by year’s end. Gasoline prices have declined to levels not seen in many years. Declining oil prices have led to large declines in the stock prices of many energy companies. In addition, the high yield (junk) bond market has seen prices fall and yields rise as fears of defaults in the energy sector have risen.
Other commodities were down as well, as the world economy, especially China, slowed down. Although the Chinese stock market was up about 5% for the year, it ended more than 30% below its June peak. Fears of a slowing Chinese economy have pressured the Chinese market. Finally, gold ended down over 10% for the year. Gold is now down 44% from its 2011 peak.
2016 has started with markets falling and increased volatility. Some of the events that may impact markets in 2016 are:
- The US Presidential election
- Further Federal Reserve rate hikes
- The slowing world economy, especially China
- Additional appreciation of the US Dollar
- Continued pressure on oil prices as Iranian oil returns to the market
- Price deflation and slower growth reducing corporate profits
- Stimulative monetary policies in Japan and Europe
- Continued chaos in the Middle East
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