U.S. Gross Domestic Product, which measures the overall output of goods and services produced in the economy, rose at an overall rate of 2.0% in the third quarter of 2015. The figures released by the Commerce Department in late-December represent a downward revision from the previous estimate of 2.1%. U.S. economic growth remains stuck in low-gear relative to past recoveries with overall growth in the U.S. likely to come in around 2.1% for the full-year when fourth quarter GDP estimates are released at the end of January. The last time the U.S. economy grew at a rate greater than 3.0% for the full year was in 2005 when GDP expanded at 3.3%.
Despite the low top-line growth in the overall economy, employers in the U.S. continued to add jobs at a relatively healthy pace throughout the year. November non-farm payrolls grew by 211,000, which was in-line with the average for the first 11 months of the year of 210,000. The unemployment rate currently stands at 5.0%, which is down from 5.6% at the end of 2014 and half of the peak unemployment rate of 10.0% reached during the recession.
Weakness in the energy sector was one of the prominent themes in 2015. WTI crude oil traded around $53 per barrel at the beginning of the year, down about 50% from where it traded in mid-2014. Late-spring and early-summer saw oil prices rebound to the low-$60’s before continuing their downward trajectory to finish the year in the mid-$30’s. Despite the decline in oil prices, Saudi Arabia, the world’s largest oil exporter, saw a year-over-year increase in oil exports in the month of October. The spending bill recently passed by Congress and signed by the President, which lifted the 40-yr old ban on U.S. oil exports, further added to concerns over a global surplus of oil.
Consumers have been the primary beneficiary of lower oil prices with the average price of a gallon of regular gasoline dropping below $2 for the first time since early 2009. This has allowed consumer sentiment to perk-up, rising to the highest level since July, according to the University of Michigan Survey of Consumer Sentiment. American households have managed to increase spending and maintain a decent level of savings. In November, consumer spending grew at a solid 0.3% after remaining flat in the previous month. At the same time, the overall savings rate ticked down slightly from the prior month to 5.5%, but remained at the second highest level since 2013.
After seven years of holding short-term interest rates near zero percent, the Fed moved to increase the benchmark rate by a quarter of a percent on December 16th. This marks the first time the FOMC has increased interest rates in nearly a decade. The move followed months of speculation around the timing of when Fed Chairwoman Janet Yellen would take the initial step towards normalizing rates following extraordinary monetary policy actions taken in the wake of the financial crisis.
In their statement following the meeting the FOMC cited “considerable improvement in labor market conditions this year” and that they were “reasonably confident that inflation will rise, over the medium term, to its 2 percent objective.”
Within hours of the Fed’s decision the nation’s largest banks, including JP Morgan, Wells Fargo, and Bank of America, raised their prime rates to 3.5% from 3.25%. The prime rate is a reference rate used to set the interest charged on numerous different types of loans.
Yields on U.S. Treasury securities rose throughout the quarter as investors anticipated the Fed’s move to raise short-term rates. The yield on the 10-year U.S. Treasury ended the quarter at 2.27%, up from a yield of 2.04% at the end of September. Two-year treasury notes, which are among the most sensitive to Fed interest rate changes, also rose during the last quarter of the year, touching a high of 1.10% in the closing days of 2015. This marks the first time the two-year note has risen above 1% in over five years.
For the first time since the financial crisis in 2007 and 2008 investment-grade corporate bond spreads are on track to increase for the second year in a row. Although spreads have increased, corporate debt issuance remains strong in 2015 after setting records in each of the past three years.
The high-yield bond market took another hit in the fourth quarter as investors fled lower-rated securities over concerns regarding exposure to weakening credits in the energy sector. Investors also became concerned about their holdings of high-yield mutual funds after Third Avenue Management LLC suspended investor withdrawals from their Focused Credit Fund. As the year comes to a close, yields on junk bonds have risen above 9%.
Treasury yields of selected maturities for recent time periods are displayed below.
|Treasury Bill||Treasury Notes & Bonds|
|3 mo.||2 yr.||5 yr.||10 yr.||30 yr.|
The total return numbers for various fixed income indices over the last twelve months are displayed below (data from Bloomberg).
|52 Week Returns (a of 12/31/15)|
|Barclay Capital US Aggregate||0.55%||Merrill Lunch US High-Yield||-4.64%|
|Merrill Lynch US Treasury Int-Term||1.24%||Merrill Lynch US Municipal Index||3.55%|
|Dow Jones Corporate||-3.46%||JP Morgan Embi Global||1.23%|
Major US stock market averages rebounded smartly in the fourth quarter with the Dow, S&P 500, and NASDAQ all rising by 8% to 10%. However, most of those gains were concentrated in the month of October with the S&P 500 returning 8.4%, followed by a relatively flat performance in the months of November and December.
As trading comes to a close for 2015 the overall US stock market will end the year approximately where it began. The S&P 500 came into the year trading around 2,060 and closed out the year within 1% of that level, leaving the dividend yield of around 2% on the index as the only source of return. The story is much the same for the Dow Jones Industrial Average, which closed trading in 2014 at 17,823. The index set a record closing high in May of 18,312 before experiencing a decline of over -14% that lasted through the month of August. The months of September and October saw the market rebound, putting the Dow on track to end the year 17,425, which was about two percentage points lower than where it started.
Any positive returns that stocks did experience throughout the year were concentrated among a small handful of companies. According to Strategas Research Partners, market performance was very narrow with the 10 largest S&P stocks up +18% and the remainder of the index down approximately -4% as of late-December. The Value Line Arithmetic index, which is a decent proxy for how the average stock has performed, was down nearly -7% for the year. Small-cap stocks underperformed large, and value stocks underperformed growth for both the fourth quarter and the full-year.
Below is a table which displays various equity index returns for the past quarter.
|Equity Indices||4th Qtr. 2015|
|Dow Jones Industrial||7.70%|
|S&P 500 Growth||7.85%|
|S&P 500 Value||6.04%|
|Russell 2000 (small-cap)||3.59%|
|MSCI/EAFE (developed international)||4.80%|
|MSCI/EM (emerging markets)||0.52%|
Foreign and emerging markets managed to produce positive returns in the fourth quarter as well. However, for the full year, foreign developed stocks as measured by the MSCI EAFE Index lagged the S&P 500. This marks the sixth year out of the past eight that foreign stocks have lagged the U.S. markets. Emerging markets were among the worst performing areas of the global equity markets with the MSCI Emerging Markets Index declining by double-digits.
With the exception of Energy, every sector of the market was up during the fourth quarter of the year. Among the best performing groups, Materials, which were beaten down the most in the prior quarter, staged the biggest increase from October through December, rising by over 9%. Contributing to the gain was the announcement by DuPont and Dow Chemical that the two companies planned to merge with one another. Energy stocks continued to languish as the price of oil hit fresh lows during the quarter and ended the year near its lowest levels since 2009.
The following table details S&P 500 sector returns for the quarter (price only).
|Return by Stock Sector||4th Qtr. 2015|
|2. Health Care||8.77%|
|3. Information Technology||8.73%|
|5. Consumer Staples||6.91%|
|8. Consumer Discretionary||5.37%|