It’s that time of year…when we reflect on the year that was and look back at the big stories that shaped the financial world. Of course this is much easier than the futile attempt to predict the future at the beginning of the year, but in the spirit of full disclosure, I am going to note when I made the right call and when I missed the boat.
1. Federal Reserve Rate Hike: In 2015, the U.S. central bank did something that it had not done in over nine years: it raised short-term interest rates. With the economy growing at a decent, though not great 2.25 percent annualized pace, monthly job creation averaging 210,000 and unemployment sitting at a seven-year low of 5 percent, Fed Chair Janet Yellen and her cohorts decided to hike rates at their last policy meeting of the year. Future Fed actions should eventually return rates to the vicinity of 3.5 percent over the course of the next three years, but how markets will react to the normalization of policy is unknown. After all, this was the first increase in over nine years, competing the longest stretch without a fed hike in 25 years. To say that the economy is in uncharted and choppy waters may be the understatement of the decade.
JS CALL: I predicted that the first hike would occur in September, not in December, so not too far off!
2. China: 2015 began as China was in the midst of a stock market boom. The steep ascent started in mid-2014, after the Chinese government urged small investors to enter the market. “Policy makers and state media continued to trumpet the rally even as prices rose well beyond most reasonable estimates of fair valuation,” according to Capital Economics, as a full-blown bubble formed.
By the June 12th peak, the Shanghai Composite was up over 160 percent from the 2014 lows. Chinese officials stepped in to try to prick the bubble that it had fostered. Unfortunately, as is the case with most bubbles, pricks often lead to pops and the market tumbled by over 40 percent, before recovering some of the losses.
Economists were less concerned with the stock market and more worried about the waning pace of growth in China. The world’s second largest economy had seen 10+ percent growth for the past three decades, but in 2015, downshifted to a 5-6 percent pace. While China slowed down in 2015 and the stock market tanked, there was no catastrophic “hard landing” as many had predicted. However, the Chinese slowdown, combined with a strong U.S. dollar, made 2015 tough for U.S. manufacturers, who experienced their worst year since 2009.
JS CALL: While I thought that the Chinese economy would slow, I did not predict that the government would intervene in both the stock and currency markets.
3. Oil Plunge: After a 46 percent drubbing, which pushed crude futures down to $53.27 per barrel at the end of 2014, oil managed to trade above $60 early in 2015. But as news emerged that China was slowing down, the bears took hold. In addition to softening demand, global production remained high. Whether it was the U.S.-based frackers, OPEC nations, Russia or Brazil, the oil spigots remained wide open. As a reminder of Econ 101: weak demand + strong supply = lower prices. The savings at the gas pumps was supposed to propel retail sales in the US, but most Americans chose to save those extra pennies, rather than spend them in other parts of the economy.
JS CALL: This is one call that I completely blew…I had counted on OPEC nations curtailing output to push up the price of oil and to keep it in a range of $50-$70.
4. Greece: Another year, another flirtation with disaster for Greece and the euro zone. After an election, a snap referendum and lots of political gamesmanship, Greece accepted the harsh terms of yet another European bailout. The Greek Tragedy might be mistaken for comedy, if the human stakes were not so high.
JS CALL: The game of chicken between Greece and the euro zone went on far longer than I thought. I did not think the euro zone (led by Germany) would be as harsh as it was.
5. U.S. stock market correction It took four years, but U.S. stocks finally dropped by more than 10 percent in August. The main driver was the aforementioned Chinese economy. Investors feared that the slowdown in the world’s second largest economy, in addition to the cooling of once-hot emerging economies like Brazil and Russia, would negatively impact the rest of the world.
The swoon was notable for its brevity - depending on the index; it lasted for a few days to a couple of weeks. Investors were long overdue for the sell-off: according to Capital Research and Management, through 2014, 10 percent corrections occur about every year and 20 percent bear markets occur about every 3 ½ years, so we are also due for one of those—the last one ended in March 2009.
JS CALL: I thought that the correction would occur, but I had no idea that China would be the driving force. Instead, I thought it would occur as a result of the Greek debt stand off.
KINGSMITH.
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