Sadly for Wall Street, it hasn’t been much of a year to celebrate. The Nasdaq Composite has managed to rack up a few percentage points worth of gains. But the Dow Jones Industrial Average and Standard & Poor’s 500 Index have barely budged. The Dow Jones Transportation and Dow Jones Utility Index have gotten pasted. And the Russell 2000 has struggled for several months now.
Why such a lackluster year? And what does that say about the prospects for 2016?
I believe the big turn in the credit cycle, the global economic slowdown, and the ongoing woes in commodities are at the heart of the stock market’s struggles. Throw in a less-friendly Federal Reserve, and divergent central bank policy overseas, and you have a recipe for lousy performance.
|The markets have confounded many observers and participants in 2015.|
Think about it: Investors grew fat and happy beginning in 2009. They could always count on free, easy money from central bankers worldwide to artificially prop up asset prices. They could count on synchronized global economic expansions to give corporate earnings a nice tailwind. And they didn’t have to worry about credit market turmoil because lenders were throwing money around like crazy.
But those very factors also laid the groundwork for the cycle turn we’re witnessing now.
Too much money flowed into the energy and materials sectors to finance the commodity “supercycle.” But the dramatic economic slowdowns in Asia, South America and parts of Europe are torpedoing demand and pricing. So investors are growing increasingly worried about a huge wave of defaults, and that worry is being priced into the credit markets.
Too much money was loaned out to too many auto loan and student loan borrowers. But now investors are growing increasingly nervous about the debt burdens those loans have left Americans with, and the prospect for rising defaults down the road.
Too much money also flowed into corporate America and yield-chasing mutual funds and ETFs during the boom years. That financed record amounts of M&A, stock buybacks, and junk bond issuance. But now investors are getting more worried about the negative impact on corporate balance sheets. So they’re selling aggressively and sending credit markets into a tizzy.
My belief (and fear) is that this process is nowhere near played out. After all, we had an epic boom/bubble in many assets and investment classes over the last seven years thanks to the massive influx of easy money. To think that would all unwind in just a few months seems naïve.
|“This cycle seems to be following the eerie pattern of the early 2000s.”|
If anything, this cycle seems to be following the eerie pattern of the early 2000s. That’s when we got a massive influx of easy money designed to combat the dot-com bust … and ended up with the biggest bubble ever in housing and mortgages (and related stocks). That bubble began to deflate in late-2005, but didn’t finish doing so until 2009.
Bottom line: Enjoy your New Year’s celebration. Open a bottle of champagne if you like, and blow as loud as you can on those noisemakers. But keep the struggles of 2015 in mind — and realize that many of the forces that helped hold markets back this year are still going to be with us in 2016.
Do you think my outlook is overly pessimistic? Or dead-on realistic? What do you believe held markets back in 2015, and what do you think will hinder (or help) stocks in 2016? Any economic or fundamental forces I overlooked, or that you believe investors need to take into account in the year ahead? Hit up the comment section below and let me hear about it.
I hope you enjoyed the long holiday weekend as much as I did — and I’m glad you took some time out to comment on the issues at hand for the markets.
Reader Jim and Reader Phil weighed in on the gold market, and their thoughts about investing in the yellow metal. Jim said: “Gold is a good hedge, just don’t get carried away. The conventional 5% holding isn’t going to hurt you, but could prove very rewarding in the event of unexpected turns in the economy.”
Phil added: “Rare, highly graded gold coins are collectibles that have nothing to do with commodity gold. They, like fine art, are priced on rarity value. If you do invest in that field, please be sure you get a seller’s guarantee (insurance) that what you are getting is not counterfeit. Only buy from established, reputable dealers.”
When it comes to sovereign wealth funds and their liquidation selling, Reader Frebon said: “The Saudis and Chinese will sell their foreign currency holdings before their equities. If the Fed keeps raising rates though, they will have to accelerate their currency selling, and then maybe equities will be on the table.”
Reader Ted F. added: “There are a lot of potential problems with the low, scrape-the-floor oil prices for the producers. Quite a few countries have gotten so used to $100-plus oil prices that they shored up their economies with the oil revenue. They expanded and expanded social programs and giveaways to bolster the leadership.
“But what happens when the money runs out? Do they borrow themselves into a deep hole?”
Finally, Reader John said: “There is no question that with oil prices down, economies slowing (and tax revenues sagging as well), and defense spending up at the same time in key areas around the globe (Europe, Middle East, and even to some extent in Asia), many of the world’s nations are facing budget squeezes. Since not increasing defense spending in many regions would be both naive and risky, they are going to call upon the reserves they’ve saved up for just such a rainy day as we are seeing now.
“It’s also pretty clear that ‘hidden sellers’ of the kind Mike describes are not simply moving things around. That money is coming out of investment vehicles of all kinds and is being spent on whatever that government’s financial agenda requires. So that represents net de-vestment in the capital markets — and it could be sizeable.”
Thanks for sharing your views during these holiday-shortened trading weeks. There are only a few days left in 2015, and several powerful trends are set to influence stocks once the new year gets underway. So we all have to be at the top of our investing game — and sharing ideas here is a great way to bolster our understanding of the markets.
You know what the best investment was this year? Basically nothing! As this Bloomberg story notes, cash, stocks, and bonds all delivered next to nothing in returns, while commodities got crushed. That makes 2015 the worst year for asset allocation-style strategies in eight decades, according to Bianco Research.
ISIS is being pushed back in northern Iraq, with government forces taking over key facilities in the city of Ramadi. U.S. airstrikes have aided in the effort, which still has a way to go.
Widespread sleet, snow, and rain across the nation’s midsection is spreading havoc during the holiday travel season, and has claimed 24 lives. Flooding and tornadoes associated with the storm system have proven the most deadly.
It looks like a lot of people got in touch with their inner dark/light sides over the long holiday weekend. Ticket sales for Walt Disney’s (DIS) “Star Wars: The Force Awakens” topped $1 billion worldwide. It managed to do so in only 12 days, the fastest any film has reached that milestone.
Are you traveling in this mess of a winter system, or staying put? Did you find it hard to identify winning investments in this year where nothing seemed to work very well? Do you think Disney will get its mojo back given the new ticket sales figures? Add your comments below when you get a chance.
Until next time,
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