Now that the U.S. Federal Reserve (the Fed) has announced it will commence its tightened monetary policy, and the end of 2015 is near, it’s time to reflect on what drove markets this year and consider the outlook for 2016. The Fed drove headlines throughout the year as market watchers analyzed every word uttered by policy makers. China’s yuan policy and slowing economy garnered considerable attention during the second and third quarters, and talk of the “Great Divergence” of monetary policies drove markets during the final stages of the year.
U.S. equities, measured by the Russell 3000 Index, enjoyed a fine start to the year until the news out of China erased all stock-market gains. The Russell 3000 (+2.58%) has since recovered and is back in the black as of the end of November. Growth companies rewarded investors, and value companies lagged with sluggish performance by the energy and utilities sectors.
The broad U.S. fixed income space, measured by the Barclays U.S. Aggregate Index (+0.88%), experienced modest gains, year to date ending November, as the Fed continued to hint at a rate hike. Junk bonds, represented by the BofA Merrill Lynch US High Yield Index (-2.12%), experienced a sell off during the second part of the year with a rise in liquidity concerns, defaults and downgrades.
Foreign developed (MSCI EAFE Index) and Emerging Markets (MSCI EM Index) had a great first few months of the year, like U.S. equities, until China’s economic troubles put a halt to their performance. After peaking in April, emerging markets have struggled due to the slowness in China and a continued slide in oil prices. Developed markets have recovered and finished the month of November in positive territory.
How will the Feds’ decision to start increasing the Fed funds rate affect markets moving forward? Will there be a Santa Claus rally? Will the selloff in junk bonds continue? Investors will find out soon.
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