Holiday Wrap-Up – 2015

A look back at 2015 thus far

The year in brief.While the S&P 500 surprised to the upside in 2014 versus the projections of many analysts, it has performed below expectations so far in 2015. As this year began, not many Wall Street pros thought the index would tread water. The consensus forecast among 13 top analysts (their opinions compiled by Business Insider) called for the end to benchmark this year at 2,213.At Thanksgiving, the S&P was hovering near 2,100. Three major head head winds buffeted Wall Street this year: a global manufacturing slowdown, and reduced demand for oil and other key commodities, and the presumption that the Federal Reserve would soon begin to raise interest rates.Dollar strength was also a factor, and the financial crisis in Greece and plunging shares in China also kept bulls in check (the S&P corrected in the wake of the swoon in Chinese equities). Hiring really picked up, though wage growth lagged; the real estate market stayed hot.^1,2

Domestic economic health.Would the Fed raise rates in summer? How about fall? How about December? As a mixed parade of economic indicators emerged during the year, investors kept wondering when or if the central bank would make a move in 2015. As the Thanksgiving weekend approached, the CME Group was putting the odds of a December rate move at 74% based on Fed fund futures prices.³

The labor market continued to improve. By October, the jobless rate was 5.0%, a 7½-year low and 0.8% below where it was at the end of 2014.The broader U-6 rate measuring “total” unemployment was at 9.8% in October, down 1.7% in 12 months. Monthly hiring gains over the year ending in October averaged a healthy 230,000.^4,5

Consumer sentiment slipped during the year. The final November University of Michigan consumer sentiment index came in at91.3, well under a peak of 98.1 reached in January. The Conference Board’s consumer confidence index fluctuated greatly in 2015 and plummeted to 90.4 in November, its worst reading year-to-date.^6,7

The economy grewjust 0.6% in Q1, then a robust 3.9% in Q2.The Bureau of Economic Analysis just estimated 2.1% GDP for Q3, in line with the average GDP reading for the past 12 quarters.Consumer spending grew stronger as the year progressed, up 3.6% in the second quarter and 3.2% in the third.^8,9

Wage growth was a concern all year; the October edition of the Labor Department’s Employment Cost Index showed personal wages rising 2.5% in 12 months, the best yearly advance recorded since the start of the Great Recession.The personal savings rate also climbed above 5% as the year went on, reaching 5.2% in Q3; in shorthand, Americans were saving up money saved at the pump. New Morgan Stanley research showed an $82 billion year-over-year drop in U.S. household spending on fuel since mid-2014, with the U.S. household saving up $100 billion in that period. ^5,10

Inflation was barely evident, at least by the measure of the Consumer Price Index, and well beneath the Fed’s 2% annual target. By October, the headline CPI had advanced only 0.2% in 12 months, the core CPI 1.9%.¹¹

Global economic health.2015 saw the deceleration of China’s economy, declines in manufacturing in many nations, the threat of Greece leaving the European Union, and a round of central bank interest rate cuts.

While Chinese premier Li Keqiang maintains that his nation will reach its 7.0% GDP target for 2015, some economists remain skeptical of such claims. The PRC’s official GDP, announced as 7.3% in 2014, slipped to 6.9% in Q3 2015. That was the first time it fell below 7% since 2009. Sixteen economists responding to a recent Bloomberg survey estimated GDP of 6.5% or less for China through 2020.¹²

In the fourth quarter, there were indications that global manufacturing was picking up – or at least not tailing off. October Markit factory PMIs hit a 1-year high in Japan and a 16-month high in England, with Markit’s Eurozone PMI at an encouraging 52.3. True, China’s Markit PMI remained below 50, India’s factory growth had hit a 22-month low, and the ISM manufacturing PMI for the U.S. was at a 2-year low of 50.1. Still, the JPMorgan Global Manufacturing PMI reached a 7-month high of 52.7 in October.^13,14,15

Greece arranged its third bailout in five years after several months of tense negotiations and threatening to make a “Grexit” and abandon the euro. Its latest financial crisis roiled investment markets this spring, but the country ultimately acceded to the bailout demands set by its creditors.¹⁶

In October, the People’s Bank of China made its sixth interest rate cut in 12 months, taking its benchmark rate to 4.35%. Key interest rates elsewhere were minimal as fall began– 1% in Japan, 0.5% in Great Britain and Canada, 0.05% for the European Central Bank, and of course the target range of 0-0.25% set by the Federal Reserve.¹⁷

World markets.Approaching Thanksgiving,the best-performing major equities markets this year could largely be found in Europe. France’s CAC 40 was up 12.8% YTD, Germany’s DAX 11.5%, Russia’s RTS and the STOXX Europe 600 9.7%, Italy’s FTSE MIB 15.4%.Not every European index was so fortunate: Great Britain’s FTSE 100 was down 4.4% YTD, Spain’s IBEX 35 down 0.7%.In Asia, China’s Shanghai Composite was +11.8% YTD, Japan’s Nikkei Composite +14.2%; on the other hand, Australia’s S&P/ASX 200 was down 3.4% for the year, India’s Sensex 6.3%, Hong Kong’s Hang Seng 4.3%. In the Americas,Brazil’s Bovespa was -3.4% YTD, Mexico’s IPC All-Share +3.3%,Canada’s TSX Composite -8.4%.¹⁸

Commodities markets.The year has been painful for many commodities investors, given a strong dollar and reduced demand.Through November 25, the U.S. Dollar Index had advanced more than10% YTD and was pushing the 100 mark.A supply glut helped send crude prices to remarkably low levels during the year: the day before Thanksgiving, WTI crudewas at $42.50 on the NYMEX with oil prices down 42.2% from 12 months ago. Similar YOY drops were recorded for natural gas (-48.3%), heating oil (-42.5%) and unleaded gasoline (-32.8%).^19,20

The important metals had also slipped badly from year-ago levels. Platinum and copper prices were respectively down 31.3% and 31.0% in 12 months. Gold had retreated 10.5% and silver 13.7% in that span, with their respective COMEX values at $1,071.90 an ounce and $14.14 an ounce heading into the Thanksgiving holiday. About the only major commodity having a great 2015 is cocoa – those futures were up 16.1% in the past 12 months on the eve of Thanksgiving. In contrast, corn was down 2.8% year-over-year, soybeans 16.8%, wheat 13.0%, coffee 37.6% and sugar 7.0%; cotton had managed a 4.5% YOY advance.²⁰

Real estate.The pace of homebuying accelerated during 2015. The latest available data (October) from the National Association of Realtors and the Census Bureau respectively shows existing home sales up 3.9% year-over-year, new home sales up 4.9% year-over-year. Cheap home loans aided the sales pace – interest rates on a 30-year FRM averaged 3.95% in the week ending November 25 according to Freddie Mac, compared to 3.97% a year before.^21,22

How about home prices? NAR saidthat the median sale price of an existing home was $219,000in October, 5.8% improved over the past 12 months.The median new home sale price had actually declined 6.0% YOY to $281,500. The 20-city composite S&P/Case-Shiller home price index showed a 5.5% yearly gain in its latest available edition (September); the Case-Shiller national home price index showed a 4.9% YOY gain.^22,23,24

As for the real estate indicators that keep an eye on the future, the Census Bureau said that housing starts were down1.8% year-over-year as of October, but requests for building permits were up 2.7% compared to a year earlier. NAR’s pending home sales index showed a 3% annualized improvement in its September edition (released in late October).^25,26

Looking back…looking forward.Economists and Wall Street strategists largely see the S&P 500 rising single digits next year. The more bullish among them see 2016 gains of from 7-11%, dependent on an improvement in corporate profits. The U.S. and global economy do look a bit shaky, especially with China transforming from a factory-centered economy to a consumer-centered one, but the Federal Reserve Bank of St. Louis’ Smoothed U.S. Recession Probabilities Chart shows virtually no chance of another downturn (and it has been a reliable indicator of recessions over the past 25 years). Earnings results from the third quarter were disappointing for many investors, but the apparent pickup in global manufacturing this fall may hint at improvement for some sectors in coming quarters. If the Fed enacts a tightening cycle starting in December, the bulls will likely still run for a while – as UBS notes, during the five tightening cycles that have occurred since 1977, there was an average of 25 months from the start of a cycle to a market peak for the S&P 500, with the index rising an average of 33.2% from where it was at the first rate hike to that peak. So while 2016 may not be a stellar year for the market, it may not be a bad one either.²⁷

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Citations.

1 – businessinsider.com/wall-street-2015-sp-500-forecasts-2015-1