Quarterly Market Review: Q4 2015
Here We Go Again…
The overall list of bad Wall Street predictions is both long and broadly-based. For example, Wall Street’s top strategists expected the S&P 500 to rally 10 percent in 2015. Instead, it ended 2015 at essentially the same level it started. It opened the year at 2,058.9 and closed the year at 2,043.9, a loss of less than one percent. The median economic forecast tabulated by Bloomberg for the 10-year U.S. Treasury note yield for year-end 2015 as of a year ago was 3.24 percent. On the other hand, DoubleLine’s Jeff Gundlach claimed that the 10-year should take out its modern-era low of 1.38 percent yield during 2015. Instead, they were all wrong – by a lot! – as the 10-year note closed the year yielding 2.27 percent. Similarly, a Reuters survey of 33 economists and analysts forecast that oil would average $74.00 a barrel in 2015 after ending 2014 above $60; it closed the year at $37.28 and continued to drop in January 2016.
Wall Street hasn’t cornered the market on these sorts of failures. For 2015, alleged experts claimed that things were looking up for Greece, that things would be fantastic at Volkswagen, that Jeb Bush would be the Republican presidential frontrunner, and that Donald Trump wouldn’t run and surely wouldn’t be very popular.
Irving Fisher, the noted 20th century economist, who Milton Friedman called “the greatest economist the United States has ever produced,” stated three days before the famous 1929 Wall Street crash that “stocks have reached what looks like a permanently high plateau.”
James Glassman and Kevin Hassett authored a book in 1999 entitled Dow 36,000. That book’s introduction states: “If you are worried about missing the market’s big move upward, you will discover that it is not too late. Stocks are now in the midst of a one-time-only rise to much higher ground — to the neighborhood of 36,000 on the Dow Jones Industrial Average.” Sadly, it didn’t exactly work out that way.
History has provided a long list of such whoppers. Analyst Clifford Stoll argued that “no online database will replace your daily newspaper.” Bob Metcalfe, an electrical engineer widely credited with the invention of Ethernet technology, stated: “I predict the Internet will soon go spectacularly supernova and in 1996 catastrophically collapse.” Federal Communications Commission commissioner T.A.M. Craven stated in 1961 that “There is practically no chance communications space satellites will be used to provide better telephone, telegraph, television or radio service inside the United States.”
Unfortunately, following such predictions (and figuring out which of MANY predictions will be right!) is all too common. Hungry for outsized returns, investors habitually bet on just a few stocks or the latest five-star fund, only to find out the market has left them behind. Undeterred, these gamblers continue to roll the dice year after year, hopeful their fortunes will turn.
Intelligent investors, instead, focus on what they truly can control—their asset mix, the costs they pay and the taxes they face. Above all, they control their behavior by sticking with a sensible strategy and plan when it seems uncomfortable or unfashionable to do so.
What if you don't mind guessing...
How often does a market-timing guru need to be right to beat an index? Nobel Laureate William Sharpe set out to answer that question in his 1975 study, "Likely Gains from Market Timing."
Sharpe wanted to identify the percentage of time a market timer would need to be accurate to break even relative to a benchmark portfolio. He concluded a market timer must be accurate 74% of the time in order to outperform a passive portfolio at a comparable level of risk. In 1992, SEI Corporation updated Sharpe's study to include the average 9.4% stock market return from the period 1901-1990. This study determined that gurus must be right at least 69% and as high as 91% of the time, depending on the timing of the moves.
What percentage of times do market timing gurus get it right? CXO Advisory Group tracks public forecasts of self-proclaimed market-timing gurus and rates their accuracy by assigning grades as "correct," "incorrect" or "indecisive." Figure 4-1 depicts CXO's percentage grades for 28 well-known market-timing gurus who made a collective 4,629 forecasts from 2000 - 2012. The study shows that not one of the self-proclaimed gurus was able to meet Sharpe's requirement of 74% accuracy, or SEI's minimum 69%, thereby failing to deliver accuracy sufficient to beat a simple index portfolio.
Fourth Quarter 2015 Index Returns
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index), US Bond Market (Barclays US Aggregate Bond Index), and Global Bond ex US Market (Citigroup WGBI ex USA 1−30 Years [Hedged to USD]). The S&P data are provided by Standard & Poor's Index Services Group. Russell data © Russell Investment Group 1995–2015, all rights reserved. MSCI data © MSCI 2015, all rights reserved. Barclays data provided by Barclays Bank PLC. Citigroup bond indices © 2014 by Citigroup.
World Stock Market Performance
MSCI All Country World Index with selected headlines from Q4 2015
Graph Source: MSCI ACWI Index. MSCI data © MSCI 2015, all rights reserved. It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results.
These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term perspective and avoid making investment decisions based solely on the news.
World Asset Classes
Fourth Quarter 2015 Index Returns
Looking at broad market indices, the US equity market again outperformed both developed ex US and emerging markets during the quarter. In a repeat from the third quarter, US REITs recorded the highest returns, outperforming equity markets.
The value effect was negative in the US, developed ex US, and emerging markets. Small caps outperformed large caps in both developed ex US and emerging markets, but under-performed in the US.
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor's Index Services Group. Russell data © Russell Investment Group 1995–2015, all rights reserved. MSCI data © MSCI 2015, all rights reserved. Dow Jones data (formerly Dow Jones Wilshire) provided by Dow Jones Indexes. Barclays data provided by Barclays Bank PLC.
Real Estate Investment Trusts (REITs)
Fourth Quarter 2015 Index Returns
US REITs were one of the best-performing asset classes during the quarter, outperforming equities. But, REITs outside the US underperformed non-US broad equity market indices.
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US REIT Index. Dow Jones US Select REIT Index used as proxy for the US market, and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones US Select REIT Index data provided by Dow Jones ©. S&P Global ex US REIT Index data provided by Standard and Poor’s Index Services Group © 2014.
Select Country Performance
Four Quarter 2015 Index Returns
In US dollar terms, there was wide dispersion in country returns across both developed and emerging markets countries. New Zealand recorded the highest country performance in developed markets, while Spain and Canada returned the lowest performance for the quarter. In emerging markets, Indonesia and Hungary posted the highest country returns, while Poland and Greece posted the lowest. China, which had previously dominated news headlines, recorded one of the highest returns in emerging markets.
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Country performance based on respective indices in the MSCI World ex US IMI Index (for developed markets), Russell 3000 Index (for US), and MSCI Emerging Markets IMI Index. All returns in USD and net of withholding tax on dividends. MSCI data © MSCI 2015, all rights reserved. Russell data © Russell Investment Group 1995–2015, all rights reserved. UAE and Qatar have been reclassified as emerging markets by MSCI, effective May 2014.
Fourth Quarter 2015 Index Returns
Interest rates across the US fixed income markets increased in the fourth quarter. The yield on the 5-year Treasury note gained 39 basis points to end the quarter at 1.77%. The yield on the 10-year Treasury note increased 22 bps to 2.27%. The 30-year Treasury bond added 14 bps points to finish with a yield of 3.01%.
The short end of the yield curve experienced the largest increase in yields during 2015.
Short-term corporate bonds declined 0.14% during the quarter but gained 1.01% for the year. Intermediate-term corporates fell by 0.42% during the quarter but climbed 1.08% in 2015.
Short-term municipal bonds returned 0.08% for the quarter and 1.21% for the year. Intermediate-term municipal bonds returned 1.26% for the quarter and 3.28% for the year.
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds are from the Bond Buyer Index, general obligation, 20 years to maturity, mixed quality. AAA-AA Corporates represent the Bank of America Merrill Lynch US Corporates, AA-AAA rated. A-BBB Corporates represent the Bank of America Merrill Lynch US Corporates, BBB-A rated. Barclays data provided by Barclays Bank PLC. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Citigroup bond indices © 2014 by Citigroup. The BofA Merrill Lynch Indices are used with permission; © 2014 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Merrill Lynch, Pierce, Fenner & Smith Incorporated is a wholly owned subsidiary of Bank of America Corporation.
This report was prepared by Gregory Saliba.
President, Taurus Capital Management
20 years in Corporate Finance and Investment Management
Debt Capital Markets
2010 Oregon Ethics in Business Award Recipient
Public Speaker on Risk, Behavioral Finance and Ethics
Finance Faculty Member (12 years)
Willamette University, Atkinson School of Business
Portland State University School of Business
Extensive Community Involvement