Markets in perspective: 2015 Market Recap

2015 was a challenging year for most investors. Equity markets were generally flat to down, as were bonds and real assets. Many of 2014’s market themes continued through 2015: 1) uninspiring global growth 2) anticipation of the Fed raising interest rates 3) falling energy prices 4) strong U.S. dollar and a new one: 5) China uncertainty. Each of these seemed to be working against capital market returns at different points in the year. Capital Market Returns 2015 Sources: U.S. Equity: Russell 3000® Index, Non-U.S. Equity: Russell Developed ex-U.S. Large Cap Index, Emerging Markets: Russell Emerging Markets Index, U.S. Bonds: Barclays U.S. Aggregate Bond Index, Global REITs: FTSE EPRA/NAREIT Developed Real Estate Index, Commodities: Bloomberg Commodity Index, Balanced: 30% U.S. Equity, 20% Non-U.S. Equity, 5% EM, 35% Bonds, 5% REITs, 5% Commodities


The global equity markets were disappointing, with the Russell Global Index down -1.7% for the year. The U.S. led developed markets, but needed a rally in the fourth quarter to move to positive territory for the year at 0.5%, as measured by the Russell 3000® Index. For U.S. investors, international equity market results were muted by U.S. dollar strength. Local currency returns approached 5% for the year, but U.S. investors received negative results (-2.0%) after the conversion to dollars for the Russell Developed ex-U.S. Large Cap Index. Emerging markets were the hardest hit of the equity segments, down double digits (-12.8%) as measured by the Russell Emerging Markets Index. Currency again played a big part of the return for U.S. investors, but emerging markets were still negative in local market results. Concern about the outlook for the global economy affected all of these equity returns. The U.S. economy appears to be on a solid, yet underwhelming, growth path. Developed Asia and Europe struggled to post a string of positive results, and expectations for the emerging economies continue to be adjusted downwards, exemplified by the news out of China. Despite these concerns, there was still some positive segments for equity investors. Within the U.S., large cap growth stocks (as measured by the Russell 200 Top Growth Index) were up +8.1% as investors were willing to pay up for growth expectations and quality. Outside the U.S., growth was also rewarded – in the small cap space, with the Russell Developed ex-U.S. Small Cap Growth Index ending the year up +9.0%.


2015 was another benign year for investment grade bond returns, with the Barclays U.S. Aggregate Bond Index returning 0.6% for the calendar year. Low yields, combined with the Federal Reserve finally increasing rates in December, subdued bond market results. At least investment grade bonds played their traditional role of capital preservation during the year. However, investors seeking additional risk in high yield were not so lucky. High Yield markets saw credit spreads widen as worries about the economy and energy prices led to speculation about higher default rates. The global high yield markets finished down -4.6% during the year, as measured by the Barclays Global High Yield Index.

Real Assets

Unfortunately, in a year in which stocks and bonds overall didn’t provide much return, real estate, infrastructure, and commodities failed to act as diversifiers for investors. REITs did the best of the three real asset categories in 2015, but still finished in negative territory, as measured by the FTSE EPRA/NAREIT Index which was down -0.8%. Infrastructure fared even worse, with the S&P Global Infrastructure Index down 11.5%. While interest rate concerns hurt both REITs and infrastructure, infrastructure was hurt even more by falling energy prices. Commodities had the worse year of them all, down -24.7%, as measured by the Bloomberg Commodity Index. Commodities were impacted by the trifecta of supply/demand imbalances, lower energy prices, and worries surrounding global growth expectations.

Asset Class Dashboard – as of December 31, 2015

ACD 2015 Large cap U.S. equity: Russell 1000® Index, Large cap Defensive U.S. equity: Russell 1000 Defensive Index, Large cap dynamic U.S. equity: Russell 1000 Dynamic Index, Small cap U.S. equity: Russell 2000 Index, Non-U.S. Equity: Russell Developed ex-U.S. Large Cap Index, Global equity: Russell Developed Large Cap Index, Emerging markets: Russell Emerging Markets Index, Commodities: Bloomberg Commodity Index, Global infrastructure: S&P Global Infrastructure Index, Global real estate: FTSE EPRA/NAREIT Developed Index, Cash: Citigroup 3-Month U.S. Treasury Bill Index, Global high yield bonds: Bank of America Merrill Lynch (BofAML) Global High Yield Index, Emerging markets debt: JP Morgan Emerging Markets Bond Index Plus, U.S. bonds: Barclays U.S. Aggregate Bond Index. How do I read this chart? This dashboard is intended as a tool to set context and perspective when evaluating the current state of a sample of asset classes. The ranges of 12 month returns for each asset class are calculated from its underlying monthly index returns. The stated inception date is the first full month of an index's history available for the dashboard calculation. Here is how to read the graphic on this page: FOR EACH INDICATOR, THE HORIZONTAL BAR SHOWS FOUR THINGS A GRAY BAR shows the full range of historical rolling 12-month returns for a sample of asset classes. A BLUE COLOR BAND represents the typical range (one standard deviation away from the mean, i.e. 68% of historical observations) of rolling 12-month returns for these asset classes. AN ORANGE MARKER represents the most recent 12-month return of the asset classes. In a year where it felt like every asset class struggled, 2015’s Asset Class Dashboard confirms that view. Every asset class listed on the Dashboard finished below its historical average. While few were outside historical norms, commodities and infrastructure were exceptions. A silver lining for investors is that assets classes tend to revert back to historical norms and the only way that most of these asset segments can go is “up.”

The bottom line

On the surface, 2015 doesn’t look like a great year to tout portfolio diversification. In reality, years like 2015 are why investors need to diversify – even though it doesn’t protect against loss. Against a backdrop of mostly negative investment markets, a hypothetical diversified balanced index portfolio avoided a meltdown and was down only -2.1% (see chart above). An investor will not build lifelong wealth by piling up negative results, but a return in this range is endurable and will allow clients to invest another day. When that day comes, and markets reverse to the positive, a diversified portfolio has the potential to benefit from its exposures.
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