As we approach the start of a new year, it appears as though stocks will end 2015 roughly flat after significant volatility throughout the year. Consider us among the grateful for nothing worse than the “breather” that stock prices have taken. In the chart below we show that 2015 could still be the 7th consecutive year of positive returns (including dividends) for the S&P 500. And despite two very ugly bear markets, the S&P 500 has produced a total return of over 8% annually for the past 20 years. Not too bad if you ask me.
- So, should investors be upset that 2015 did not produce the stellar returns we enjoyed during 2012-2014? Absolutely not, if you think about some of the headwinds that stocks have had to overcome. Consider the following:
- S&P 500 operating earnings are expected to be roughly flat in 2015 compared to 2014.
- The Shiller P/E ratio, or Cyclically Adjusted P/E ratio, currently stands at over 25x compared to a long-term average of about 17x. (The Shiller P/E ratio is based on average inflation-adjusted earnings from the previous 10 years).
- The Fed has taken its first steps toward monetary tightening by raising the Fed Funds rate for the first time in 9 years.
- Growth in the Chinese economy has slowed to its lowest rate since 1999, and Europe and Japan remain in slow-growth mode.
- The dollar has risen dramatically against other major currencies, contributing to the weakness in US exports.
- Geopolitical uncertainties have been abundant, including: Iraq, Iran, Syria, Ukraine, and the rise of ISIS.
- A collapse in energy prices has decimated many upstart and well-established US energy companies, leading to sharp decreases in the high-yield bond market that could spread to other sectors.
- A widening in the wealth/income gap has contributed to strong support for radical presidential candidates who espouse policies generally considered unfriendly to economic growth, like protectionism, greater restrictions on immigration, and greater wealth/income redistribution.
And so, there is much to be thankful for this holiday season (not the least of which should be the Redskins winning the NFC East). Next year promises to bring new challenges, but also new opportunities. At Farr, Miller & Washington, we think it’s a fool’s errand to try and time the markets. Had investors sold stocks based on their fears over the past several years, they would have lost out on huge gains. And while the challenges now seem greater than at almost any other time in the recent past, we will find our way through. Just like we always have.
Wishing everyone a very happy holiday season,