2015 REVIEW

2015 was a challenging year for U.S. stocks.  The stock market took investors on a wild ride, but in the end it essentially ended flat.  In between, stocks hit a record high then took their steepest decline in four years.  The Dow Jones Industrial Average and the Standard and Poor’s 500 Stock Index (the broadest of the indices) declined for the first time in six years, -2.2% and -0.7%, respectively. 

On the surface, as mentioned, it would seem that 2015 was a lackluster year for investors, but it was truly a roller coaster ride for stocks.  After a weak start to the year, stocks reached a record high in May.  They dropped 12% in August and September primarily because of China’s surprise devaluation of its currency and worries about the strength of the global economy.  In October, stocks recovered, but in November experienced a severe decline due to the continued drop in oil prices.  In December, stocks rallied somewhat after the Federal Reserve raised interest rates for the first time since 2006. 

Of course, worries about ISIS and the political environment added to the bumpy year. 

Overseas stocks had their own challenges.  International stocks produced mostly negative returns for the year. 

Throughout these wild swings, we felt our common stock approach of owning individual stocks, as well as stock funds - comprised of strong companies with attractive dividend yields – proved relatively effective.  In this bumpy environment, investors also gravitated to stocks in industries they felt would generate more reliable earnings growth.  We were pleased that our heaviest sector weightings were the health care, technology, and consumer staples which represented 3 of the 4 best performing sectors in 2015. The worst performing sectors last year were energy (down 28%) and materials  (down 22%).  While our stock sections had little exposure in these 2 industries, their negative influence was nevertheless felt. 

We increased our weighting slightly in the financials sector which, in retrospect, has not proven effective as yet.  We may have been a little early, but in a rising interest rate environment, bank earnings historically benefit because their net interest margins will widen. 

Our mutual fund approach continued to stress diversification by investment style and asset size.  The “core fund” for every portfolio was comprised primarily of large companies, described as either a “growth” or “value”.  We favor both types of large-cap funds, primarily because they generally perform well in good and tough times.  In 2015, they experienced gains (albeit small).  Small and medium-cap stock funds mostly declined last year.   

While most bond strategists predicted bonds to lose value last year, instead, prices were steady in 2015.  (Bond prices and rates move in opposite directions).  Bond yields barely rose.  The yield on the 10-year Treasury bond was 2.17% at the end of 2014.  On December 31, 2015, it was 2.27%. 

The prices of high quality bonds and bond funds which characterize our approach were stable in 2015.  Prices of lower quality, high yield bonds and bond funds, however, declined precipitously.  Many had heavy representation in energy companies.