Fourth Quarter 2015 – “Uncharted Territory”
In 2015, the S&P 500 Index posted a small gain while most global equity benchmarks ended the year in the red. Fixed income markets acted similarly, with lower risk securities flat for the year while their higher risk counterparts declined. For the first time since 2006, the US Federal Reserve raised interest rates, kicking off a new era in monetary policy. While the rate hike was hardly a surprise, it occurred while investor sentiment was in a state of flux, and risk-asset performance reflected this dynamic. At the heart of investor turmoil are questions concerning the sustainability of global growth, given that the improving economic picture in the US and other developed markets is being countered by a deceleration in China and other emerging markets. These concerns are also echoed by fiscal authorities such as Christine Lagarde, the managing director of the International Monetary Fund, who recently stated her expectation that global economic growth will likely be “disappointing and patchy” in 2016. Bottom-up fundamentals offered a similarly murky picture. For US-focused investors, the domestic equity markets’ valuation levels and rates of earnings growth leave little wiggle room for unexpected macro-economic shocks; the Shiller CAPE ratio for the S&P 500 is hovering near its 25-year average and, according to Factset, analysts are predicting an average earnings growth rate of only 0.5% for the index. Meanwhile, corporate margins in non-US developed markets of Europe and Japan are still well below those of the US and have some room to grow (as these regions’ accommodative monetary policies continue to promote growth). Given all of these factors, the 2016 macro and fundamental backdrop seems slated to look much like that of 2015.