After three years of strong market returns, 2015 performance was relatively flat combined with higher volatility across most asset classes. Sluggish global economic growth, concerns over a hard landing in China, a further decline in oil prices, and the anticipation of the Federal Reserve’s first interest rate hike since 2006 weighed on markets. The U.S. dollar was a top performing asset class, gaining more than 9%, while commodity-related assets were the worst performers. Large cap U.S. equities outpaced small cap and international equities, fixed income delivered lackluster returns, and alternative strategies generally underperformed expectations, resulting in a difficult year for diversified investors.

Despite a robust fourth quarter, U.S. equity markets ended the year with a small gain on a total return basis. There was also wide dispersion across sectors. Consumer discretionary dominated with a double-digit gain, followed by healthcare and technology. Energy experienced a greater than -20% loss for the year. With sluggish economic growth as the backdrop, investors significantly favored growth over value from a style perspective across all market capitalizations, but particularly in the large cap space where the spread was more than 900 basis points. Small caps faded after a strong start to the year, with the Russell 2000 Index declining more than -4%.

Developed international equity markets performed in line with U.S. markets in local terms during 2015, but lagged in U.S. dollar terms. Unlike in the U.S., small caps outpaced large caps in international markets. Japan was the strongest performing market with a gain of almost 10%. Emerging markets significantly underperformed developed markets. The weakest performer was Brazil, with a decline of more than -40% in U.S. dollar terms. Of the BRIC countries, only Russia was able to deliver a positive return.

Longer-term U.S. Treasury yields moved slightly higher in 2015, with the 10-year rising 10 basis points to end the year at a level of 2.27%. The shorter-end of the curve moved higher, resulting in a modest flattening of the yield curve. Even with the Fed’s actions, we expect longer-term rates to remain range-bound in the intermediate term. All investment-grade fixed income sectors except for corporate credit delivered modest gains, and municipal bonds outperformed taxable fixed income. High-yield credit spreads widened meaningfully throughout 2015 and the asset class declined more than -4%. Technical pressures, including increased supply and meaningful outflows, weighed on the high-yield market with the most impact on lowest-rated credits; however, we have yet to see a meaningful decline in fundamentals.

The global macro backdrop keeps us positive on risk assets over the intermediate term as we move through the second half of the business cycle. However, we acknowledge that we are in the later innings of the bull market that began in 2009, and the risks must not be ignored. We find a number of factors supportive of the economy and markets over the near term.

However, risks facing the economy and markets remain, including:

Market technicals remain weak, but valuations are back to more neutral levels. Investor sentiment, a contrarian signal, is near extreme pessimism territory. We expect a higher level of volatility as markets digest the Fed’s actions and we move through the second half of the business cycle; however, our view on risk assets remains positive over the near term. Increased volatility creates opportunities that we may take advantage of as active managers.

Source: Brinker Capital. Views expressed are for informational purposes only. Holdings subject to change. Not all asset classes referenced in this material may be represented in your portfolio. All investments involve risk including loss of principal. Fixed income investments are subject to interest rate and credit risk. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. Brinker Capital, Inc., a Registered Investment Advisor.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Brinker Capital.

Connect and Read More About Us