2015 brought with it a seemingly endless deluge of volatility ultimately resulting in markets finishing the year down 0.7 percent. Looking back, three main issues dominated center stage: the fed and their interest rate policy, the continued slowdown in China, and the seemingly endless supply glut in oil.
To recap, the latter half of the 2015 market environment was encompassed by the Fed’s decision to either raise or delay raising rates. The initial consensus focused on rates first rising in September. When this didn’t come to fruition, focus shifted to October and later, December. To be clear, it wasn’t the number of eventual increases or even the amount of the proposed rate hikes that had markets on edge; rather it was the perceived indecision on the part of the Fed and the implied lack of faith delaying imparted on the economy as a whole. Ultimately, the Federal Reserve raised in December by 0.12 percent bringing rates to 0.24 percent. While this is effectually a doubling of rates, we are still at historic lows; for some perspective, interest rates were at 5.26 percent prior to the 08’ crash. Having raised rates back in December, the Fed was able to stay much of the worry that plagued markets prior to raising them. Although the interest rate discussion has largely dropped out of the news for now, it will undoubtedly be a hotly debated issue in the latter half of 2016 as well with the Fed’s vice chair Stanley Fisher touting 4 more raises before the year is out.
Just as the Fed ameliorated fears over the timing of the first rate hike and markets began to acquiesce into a period of potential normalcy, both lackluster growth in China and an acute supply glut in oil began to rattle the market through year end and into 2016. Turning first to China; I feel it is necessary to delineate the issues there before expanding on any potential impacts China could have domestically. As an economy, their annual GDP growth rate has been decreasing since 2010. For the past two decades, China had been growing between 8 and 10 percent a year. However, the last five years have seen a departure from this trend as China’s most recent annual report showed GDP growth of 6.9 percent. While this is a little more than double what the U.S. usually sees during healthy expansionary periods of growth, it is a departure from what has come to be considered normal rates of growth for China. It is this shift downwards that has many worried that China has further to fall. In an effort to boost exports, and their GDP, China has made several devaluations of their Yuan since August 11, 2015 resulting in a rapid 3 percent drop in the yuan relative to the dollar. This move makes Chinese exports that much cheaper and was perceived to be a move by the Peoples bank of China to stem their contracting GDP numbers. While some took this move to be a confirmation that the Chinese economy has become weaker than expected, the majority consensus is that China will move to prevent an unfettered decline.
Moving on to what has been the main drag on markets for a little over a year, decreased oil prices continue to weigh heavily on market sentiment. As I wrote this newsletter this time last year, the supply glut in oil had only begun to take shape with oil prices pushed to a 6 year low. 2015 saw oil drop even further with it now trading at 12 year lows or $30 a barrel. At this point, the oil market is no longer beholden to the tenets of supply and demand; rather it has been a race by producers to shut down the competition. Those producers that can’t survive at the lower prevailing prices are being forced to restructure their costs or file for bankruptcy. The oil industry as a whole requires large amounts of cash, and capital to finance exploration and drilling operations with cash flows appearing at the back end. With prices sliding as they have, many oil operations can no longer support their debt load and have been forced to negotiate their credit terms or close down. This unparalleled slide will continue until many suppliers either shut down their operations or are able to afford to cut production while concurrently meeting their debt obligations in the near term and the excess supply ceases to grow. However, we feel this is unlikely to occur in the next month or so as the U.S., which recently lifted its 40 year ban on exporting oil, started shipping oil overseas. Moreover, Iran, which had been limited in exporting its oil due to international sanctions regarding its nuclear policy, will now be allowed to begin exporting once again. The effect here being that more oil will be available globally, putting further downward pressure on the price of oil.
The key takeaway for 2016 is that we feel markets will continue to trend down as oil continues to slide. If we see a turnaround or even a leveling off of the oil trade, then much of the uncertainty currently plaguing the market will abate allowing markets domestically to trend upwards. Even if the Fed should introduce further rate hikes in future months, we feel they will do so in the most dovish way possible as they are still far from meeting their inflation target and are apprehensive about a job market that finally seems to be headed in the right direction. While uncertainty in oil prices has led markets to sell off in the short-term, $30 a barrel oil saves the average consumer several thousand dollars annually when compared to 2013. This translates into additional funds that can be spent on consumption long term. With moderate U.S. GDP growth of 2.5 percent annually and an unemployment rate at an 8 year low of 5 percent we feel that markets could finish the year up 5 to 8 percent.
 All references to market(s) here and throughout this newsletter use the S&P500 as the underlying index