Sir John Templeton coined the phrase, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” In 2015, we expected investors to transition from “skepticism” to “optimism” as we experienced (1) solid momentum in U.S. economic growth with low inflation, (2) a pickup in consumer spending based on job growth, confidence and a positive wealth effect, (3) solid earnings growth, (4) stimulus from low commodity prices and financing costs and (5) a still-good liquidity environment aided by stimulus from non-U.S. central banks. Our expectations were mostly on track, as reflected in the predictions we made at the beginning of the year:
1. U.S. GDP grows 3% for the first time since 2005.
Growth averaged 2.2% over the first three quarters, slightly less than what we expected. We believe growth could accelerate modestly next year.
2. Core inflation remains contained, but wage growth begins to increase.
Falling energy prices kept inflation levels low this year, but we have been seeing indications that inflation may start to creep higher. The latest reading from November shows average hourly earnings rose 2.3% year-over-year.
3. The Federal Reserve raises interest rates, as short-term rates rise more than long-term rates.
It took until the end of the year, but the Fed finally increased rates in December. The 10-year Treasury yield is close to unchanged for the year, while the yield on the 2-year rose from 0.66% to 0.95%.
4. The European Central Bank institutes a large-scale quantitative easing program.
The ECB launched its its massive easing program in January and expanded its bond purchases at the end of the year. The central bank is continuing to look for ways to promote growth in Europe.
5. The U.S. contributes more to global GDP growth than China for the first time since 2006.
We expected Chinese growth to slow in 2015, but were surprised by the magnitude of the decline. So far this year, the United States has contributed $448 billion to global GDP compared to $390 billion from China.
6. U.S. equities enjoy another good yet volatile year, as corporate earnings and the U.S. dollar rise.
Whether we get this one correct will depend on if the volatile equity market finishes in positive territory. Corporate earnings have been mixed, with the energy sector dragging down overall results. The dollar rose sharply this year and is up 9.3%.
7. The technology, health care and telecom sectors outperform utilities, energy and materials.
This is the prediction we got “most correct” this year. Our preferred sectors handily outperformed our least favored ones. The former group are up an average of 3.4% and the latter are down 13.4%.
8. Oil prices fall further before ending the year higher than where they began.
Oil prices were extremely volatile this year. Prices were higher than their starting point ($53) at several times throughout 2015, but experienced a sharp downturn in recent weeks and are now at $35.
9. U.S. equity mutual funds show their first significant inflows since 2004.
In contrast to prediction 7, this is the one on which we are “most wrong.” Through November, equity fund flows have been negative, which makes the relative resilience of equity prices quite impressive.
10. The Republican and Democratic presidential nominations remain wide open.
Hillary Clinton remains the front runner for the Democratic nomination, but she has yet to solidify her polling numbers. The GOP race remains almost impossible to predict.
Looking Ahead to 2016
Our 2016 predictions will be available in early January, but we can offer some broad themes about how the year might progress. We think global economic growth will slowly improve and expect inflation will start to move higher. Oil prices should stabilize, although will probably remain range-bound. The U.S. dollar should continue its advance, but at a more moderate pace. The key variable for equities will probably be the earnings backdrop. Corporate earnings have been under pressure throughout 2015, and we think improvements in revenues and profits are needed for equity prices to advance. This should be possible as long as economic growth holds up, although results are likely to be uneven. This means 2016 is likely another year in which investment selectivity is critical.
Robert C. Doll, CFA, is senior portfolio manager and chief equity strategist at Nuveen Asset Management.