Q1 2016 Quarterly Outlook
If we had to summarize 2015 in a word, “challenging” would be our choice. As popular media has highlighted, 2015 was one of the toughest years on record for asset allocation as returns were low-to-negative across asset classes and geographies. Most major indices and asset classes generated negative returns for the year, and only a few major equity indices returned more than +2%. It was also only the second time in 20 years during which one of the four major asset classes (stocks, bonds, cash, and commodities) did not return at least +10%.
So why was 2015 so challenging? Much of that answer requires a look at where we are in the economic cycle. 2015 marked an inflection point in Fed policy – an intentional transition to slow economic growth and ease inflation pressure. Historically, these moments in prior cycles have been characterized by increased volatility and challenging financial markets. 2015 was no exception and nervous conditions have spilled into the new year. This is not meant to discourage investors but to raise awareness that markets cycle and heightened volatility is common at this stage. Investors who stuck through the prior two interest rate liftoffs (1994 and 2004) saw equity markets generate attractive gains in subsequent years.
Led by a 15% decline in crude prices, the first two weeks of the new year have been disappointing to say the least. All risk assets are trading down with oil as investors question whether the supply/demand imbalance is indicative of weakening demand instead of excess supply. Despite the weak start to the year, we remind investors that sentiment can dictate short-term performance, but fundamentals are ultimately responsible for long-term returns. In the accompanying slides, we highlight opportunities for 2016.