2015 was a year of ups and downs for many financial markets around the globe with volatility spurred on by fears of default in emerging markets, a major decline in oil prices, lower economic growth in China, and the highly publicized rise in the federal funds rate in the United States. Throughout the year we offered our insights on many of these events as well as explanations of market cycles, dealing with risk, and how a rise in rates affects your portfolio by way of our weekly newsletter. As we look back on 2015's performance and look ahead to another year of potential volatility, we'd like to offer a few quick recaps that will hopefully give you a better idea of what drove performance this past year and what to expect in the year ahead.
Value v. Growth
In September we wrote about the difference between value and growth in an article titled "Investing for Value." Focusing on how to capture value for our clients is one of the primary tenants of our investment strategy, not to mention our firm, and can be seen through the use of our fundamental funds. These funds are a way for us to buy into stocks that appear to be "cheap" as measured by their fundamentals with the hopes that as these stocks become fairly valued, we will be able to capture the difference in returns. This focus on fundamentals is what contributes to our tilt toward value investing. While it is impossible to know when prices are going to revert toward being fairly valued and when they are going to become even more undervalued, history shows us that over the long-term, prices will normalize and a focus on value investing will provide better returns. This year, however, growth stocks did outperform value which has led to some underperformance as you can see in the style box below. Fortunately, we believe that historical cycles will continue to hold and that our emphasis on value will be rewarded over time.
2015 S&P 500 Returns By Style
In March we released an economic insights video about the glut of oil in the global economy followed by another article in late September on the future prospects of oil. Since then oil has continued its volatile run inching even lower in December. In our September article we ventured that while oil probably won't see the same highs that it enjoyed in the last decade, the markets have historically sought to find a balance between supply and demand. Already we've seen many oil rigs in the U.S. shutdown and it's likely that we will see continued changes in the oil industry as producers attempt to stay profitable by balancing their output with additional research into new markets for energy.
While it was some time ago, you may still remember the fear of a Greek default in the late spring and well into the summer. In April we wrote an article titled "Greece, Germany, and the Uncertain Euro" in which we discussed the historic relationship between the two countries and their currency, and what led to the current crisis. We highlighted the extensive debt Greece took on to host the Olympics in 2004 and noted the lack of consistency and transparency when it came to its government budgets. We also brought to light the fact that Germany has had its own share of struggles with financial deficits in the early 2000s and in July wrote an additional article noting the many times countries have defaulted on their debt. By observing the number of sovereign defaults historically (and there are many) we're reminded that a nation defaulting on its debt is nothing new and can often be a good reset for a country. While Greece is currently in a period of calm, we'll likely hear from them again as they continue to navigate the journey towards a more stable economy.
Turning from one developing country to another, we continue to find ourselves in rough waters with China and its uncertain future. In July we wrote about China's declining annual growth projections and we postulated lower potential returns out of China going forward as the government there shifts away from job creation and towards investing in more long-term sustainability (think infrastructure and environmental health investments). This doesn't mean that China will experience negative growth going forward. Far from it. In fact China will continue to outpace the U.S., however, it will grow at a lower rate than it has in the past. Looking at emerging markets with a broader lens, we wrote about what makes a healthy developing market in August where we listed six key aspects of a healthy emerging market: savings and investment, having a financial market, political stability and property rights, education and healthcare, tax and regulatory systems, and free trade. Unfortunately, as we surveyed the globe in 2015, there were many of those key elements missing from emerging markets with political scandals and fraud erupting in parts of South America and a great deal of turmoil in the Middle East and parts of Africa. This led to significant underperformance in the emerging market sector, however, we have been rebalancing into the downturn and believe ourselves to be well positioned in those markets for the long-term.
In December the Federal Reserve finally raised the federal funds rate by .25%. We wrote several articles throughout the year detailing the impact of the federal funds rate and the Federal Reserve's dual mandate to manage interest rates and inflation and in doing so help stabilize our economy. While the media portrayed a rise in interest rates as near-apocalyptic, it can actually be seen as a good sign. The reason the Fed chose to raise rates is that it felt the economy had finally recovered from the recession and was in a healthy place citing low unemployment as one of the key indicators for the raise. While we noted the inverse relationship between interest rates and bond prices in our article on interest rate risk, we also noted that the rise in the fed funds rate does not necessarily mean a rise in all interest rates nationwide and that instead we will likely see a trickle-down effect with the rise slowly working its way from the big banks to the little banks and finally to the consumers. Going forward, the Fed will likely continue to slowly raise rates as the U.S. economy continues to grow until it reaches a rate that it feels is stable.
It's been quite the year for financial markets and we expect the roller coaster ride to continue well into 2016, however, we continue to keep our eyes on the many factors influencing the markets and encourage you to stay up to date by subscribing to our weekly newsletters where we share our insights (if you haven't already). We continue to take the trust you place in us very seriously and strive to provide you with the greatest value in every area of the business we do. In the year to come, we invite you to stay tuned for educational conferences and client events in addition to our newsletter as we continue to offer a variety of opportunities for you to be informed about the economy and the markets that influence us. We hope this year in review finds you and your loved ones well and wish you a very happy start to the New Year.