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1 Jan

The ACM Journal 2015 Q4

The Year in Review

Investment returns in 2015 were not as bad as in 2008. That is the only positive thing I could come up with.

Some parts of the market, such as large-cap stocks and bonds, eked out positive returns for 2015. However, even those returns were anemic. In a further blow to those following the time-tested tenets of investing, diversification mostly hurt rather than helped.

Large-cap stocks, as measured by the S&P 500 index, returned 1.4% for the full year. Mid-cap and small-cap stocks actually lost money for the full year, as did just about any market outside of the U.S. Emerging markets were a disaster, losing almost 15% for the year. See the chart below for the full picture of capital market returns for the fourth quarter and full year.

What happened? Well, a lot of things. First, we were in the seventh year of a bull market that saw the stock market rise well over 100%. This unquestionably has an impact on valuation metrics (such as the price-to-earnings or P/E ratio), which many have argued are at the high end of what is reasonable. Most bull markets don’t end because of high valuations, but high valuations do cause investor skittishness, and contribute to the volatility we’ve been experiencing.

Also, oil prices falling from $75 per barrel to less than $40 during 2015 led to investor unease. Low oil prices may sound like a good thing, but any big, sudden change can be viewed skeptically by the market. Also, because oil profits are such a big component of total stock market earnings, already high stock prices looked even more expensive when viewed against declining profits. Most economists believe there will be a benefit to consumers from falling oil prices, but so far that has not been overly visible in the economic data releases. Perhaps the uncertainty in the capital markets has dampened any potential increased spending that lower oil prices should cause.

The China Syndrome
In addition to oil, virtually all other commodities also fell in value during 2015, as China’s economic situation appeared to deteriorate. Government data released from China is notoriously unreliable, but there were definite signs of slowing economic growth, particularly late in 2015. The Chinese stock market also ran into trouble. It fell more than 40% between June and August, and is still down almost 40% as of this writing.

Chinese stock market turmoil led to stock market volatility around the globe. The U.S. market stumbled in August and September, and has gyrated wildly again in the New…

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