Flat 2015

2015 was a volatile year.  We finally had a 10% correction after four years without one, and daily moves of over 1% in either direction were the most in the same time frame.  Despite all this excitement, S&P 500 ended up nearly at the same level of the start of the year, declining by a fraction of one percent.

The market leadership this year was fairly narrow.  Any gains in the market were driven by companies that were able to grow revenues at a high pace,  such as so-called FANG stocks — Facebook, Amazon, Netflix and Google.  Facebook and Google gained over 30% during the year, while Amazon and Netflix more than doubled.  Of course, other prominent growth stocks, such as Baidu, Mercado Libre, Zillow, Apple, etc. did not fare well during the year.  The fundamentals remain strong, however, and these firms could well take over the market leadership next year.

On the macro level, two issues kept a lid on overall market performance this year: strong dollar and a crash in oil prices.  It appears that even after the first Fed hike since the Great Recession, dollar is finally stabilizing against major currencies.  Barring further appreciation of the dollar, Q4 looks to be the last quarter to suffer from unfavorable previous year comparisons that depressed dollar-denominated multinationals’ earnings in all of 2015.  Thus, we can look forward to currency headwinds to abate or even disappear next year, helping  earnings growth.

Oil prices, like that of any commodity, are driven by supply and demand.  While an argument could be made that demand is weaker primarily due to slowing growth in China, most definitely the collapse in prices was driven by supply.  OPEC is engaged in price war with shale producers, hoping to drive them out of business.  As a result, most oil-producing countries operate at a loss and the world is awash in oil.  Low oil prices clearly are not great for energy companies and this sector had negatively influenced overall market earnings.  However, cheap oil is a boon for other industries and for consumers, and I don’t think that is reflected in the market at this point.