Q4 2015 Quarterly Review

Global markets accelerated during October before stumbling along sideways and eventually falling towards the end of the year. The markets were negatively impacted by the weakness in oil prices and renewed fears of economic fallout from a slowing Chinese economy. The US Federal Reserve made good on their guidance and raised their benchmark rate for the first time in nearly a decade; a signal that the Fed believes the economy is strong enough to support itself. The US economy did in fact show signs of strengthening during the quarter. Consumer and business spending increased, and consistent job growth put upward pressure on wages. In Europe, the ECB extended its quantitative easing plans and stressed that it would be able to spark enough inflation growth to hit targets. The Bank of Japan also pushed forward with its own quantitative easing measures. Emerging markets were highly volatile during the quarter as the headwinds of a slowing China, stronger US dollar, and rout of commodity prices were too much to overcome. 2015 was defined by the return of market volatility, and the divergence of a multitude of economic factors influenced by central bank policies.

Domestic Equities
US markets rebounded off of August and September lows and surged higher during the month of October amid speculation that the Fed would delay its first rate hike until 2016. Investor sentiment remained high leading up to the Fed’s December meeting, and forward guidance stymied some of the market uncertainty that we had been accustomed to seeing leading up to the year’s earlier Fed meetings. Stocks performed well during the quarter with the S&P 500 returning 7%, the DJIA returning 7.7%, and the NASDAQ leading the way with returns of 8.7%. The volatility that was in the headlines for much of the year returned in December and pulled prices down as oil continued to plummet, investors coped with the effects of the first rate hike, and a potential liquidity crunch in the high yield bond market weighed on investors’ optimism.

Foreign Equities
As a whole, foreign equities performed relatively well for the quarter. The MSCI EAFE returned 4.7% in US dollar terms. European markets underperformed their developed market counterparts but generated positive returns for the quarter. The MSCI EMU returned 6.5% in local currency terms but only 3.7% in US dollar terms as the euro fell against the dollar. Market expectations that the European Central Bank (ECB) would significantly increase its quantitative easing program helped boost investor sentiment and demand for risky assets through most of the quarter. However, European markets were disappointed by the scale of the ECB’s increase to its easing program and equities sold off for most of December. UK equities performed fairly well during the quarter with the FTSE All-Share index returning 4.0% in local currency terms but only 1.2% in US dollar terms. The markets struggled to cope with weakness in crude oil prices and fears surrounding the Chinese economy were renewed during December. In Japan, Prime Minister Abe called upon businesses to help stabilize the recovery by raising wages and increasing capital expenditures. His pleas had little effect but the Bank of Japan reaffirmed that it was committed to keeping policies easy as economic signals remained mixed and data showed that Japan entered a technical recession during the quarter. The TOPIX index returned 9.4% in US dollar terms and 9.8% in Yen terms, with almost all of the gains coming during the October recovery. Emerging markets posted positive returns for the quarter but were the worst performing equity class in US dollar terms. The MSCI Emerging Markets index posted returns of 0.7%. China returned to the headlines with their central bank announcing further support of the slowing economy. The slowdown in China, strengthening US dollar, and falling commodity prices were the strongest drags to emerging market performance.

Fixed Income
The global bond markets diverged further during the quarter after the US Federal Reserve raised its benchmark rate by 0.25%. Many other central banks followed suit with rate raising policy actions of their own, however, conversely, they pushed forward with easing measures and deeper rate cuts. The 10-year Treasury rose from 2.04% to 2.27% over the quarter. The Barclays US Agg fell slightly (0.6%) during the quarter, which was expected following the Fed’s decision to raise its benchmark rate. US municipal bonds continued to pace the fixed income market with returns of 1.5% for the quarter. Munis continued to be a solid asset class during Q4 as they have largely been shielded from international developments and the negative effects of the commodities market while low issuance and high demand pushed up prices. The S&P National AMT Free Muni index returned 1.69% for the quarter. Overseas, the ECB increased its monetary easing measures, but investors in the region were underwhelmed by the magnitude of the increase and rates increased as a result. The Bank of Japan also rolled out new easing programs during the quarter. The Barclays Global Agg Bond ex US index returned -1.3% for the quarter. The high yield market was the focus for much of the quarter as concerns about liquidity and the closure of a prominent high yield manager’s fund spooked the market. The Barclays High Yield index was down -2.06% for the quarter.

Alternative Investments
Hedge funds struggled to keep up with equities over the fourth quarter with the HFRI Fund Weighted Composite index returning 1.3%. Equity hedge strategies performed well throughout the quarter. Quantitative strategies outperformed during the October run up but declined during the final months of the year. Relative value strategies underperformed during the quarter. In commodities, OPEC effectively dissolved following a meeting which put the leaders of many of the world’s largest oil producers at odds. The realization that OPEC would let the free-market determine price renewed downward pressure on crude oil prices. The Bloomberg Commodity Index fell 10.5% during the quarter as oil prices continued to decline and global supply and demand remained out of sync for many commodities. Poor housing market news late in the quarter was not enough to dampen real estate returns. Home prices moved upwards for most of the quarter and US real estate outperformed the broader market during the quarter with the DJ US REIT posting a 7.2% return. The demand for real estate and income oriented investments was not restricted to the US. The FTSE NAREIT All Equity REIT index returned 7.7% for the quarter.

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