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Fourth Quarter 2015 - Pinnacle Investment Management, Inc.

Fourth Quarter 2015

January 11, 2016 / Quarterly Newsletters

US large company stocks advanced in the fourth quarter, however they finished the year close to where they began, while encountering volatility along the way. Large companies did better than mid size companies, which in turn did better than small size companies. The large cap S&P 500 index, a size (market capitalization) weighted index, eeked out a small gain, while an equal weighted index composed of the same stocks lost 2.7%. This occurred since a few large companies such as Microsoft, GE, Amazon and Facebook did especially well. The lackluster market can at least be partially attributed to falling corporate earnings in the energy sector, as well as the strong US dollar which reduced both US exports and the dollar value of overseas earnings of US multi-national corporations. The combined earnings of S&P 500 companies, when they are reported, are expected to decline 6% in 2015.

With the exception of Japan, it was unprofitable for US investors to invest dollars overseas, as a strengthening US dollar turned local currency gains into US dollar losses. Emerging markets had an especially difficult time, and most were down double digits.

2015 was a difficult year for investors as most asset classes either tread water or lost ground. Energy prices, commodities and high yield bonds all suffered significant losses in 2015, while technology and healthcare stocks advanced.

Although the yield on the US Treasury 10 year ended the year at 2.3% not far from where it began bonds struggled to advance and the US Aggregate Bond index gained only 0.5% for the year.

Fortunately lower oil prices were a result of higher production levels from new technologies rather than diminished demand. Energy exporting countries such as Russia, Iran, Venezuela and Saudi Arabia are suffering from dramatically lower revenue, while net energy importing countries such as the US, China, Japan, India and South Korea are benefiting from much lower energy costs. Similarly, companies, industries and geographic regions of the country devoted to energy production are suffering, while airlines and other energy consuming industries are benefiting.

The US economy grew at about a 2% rate in 2015, a relatively sluggish growth rate, and below the 2.5% growth in 2014. This growth has come almost entirely through the addition of more workers and not through productivity gains.

For the first time in over seven years the Federal Reserve has begun raising short term interest rates from an extremely low 0.125% to still an extremely low 0.375% and indicates that they will continue to increase rates albeit slowly.

Returns for key indexes (including dividends) were:

4th Quarter


Full Year


Dow Jones Industrials 7.7% 0.1%
S&P 500 7.0% 1.1%
NASDAQ 8.4% 5.7%
S&P 400 mid-cap 2.2% 3.7%
Russell 2000 small-cap 3.2% 5.7%
Total International, excluding US 2.6% 4.2%
Dow Jones World Stock 4.7% 4.0%
Barclays Aggregate Bond Index 0.5% 0.5%


Economic and Market Outlook  Professor Jeremy Siegel of the University of Pennsylvania believes the fair value of the S&P 500 to be 2300, approximately 12% higher than its 2015 year-end level. If that level is achieved in 2016, it implies a potential return of approximately 14% if dividends are included.

Also boding well for 2016 is that only five times in history did the S&P 500 notch gains or losses of between plus or minus 1% or less (before dividends) as it did in 2015. In four out of five of those occasions, the market had double digit returns the following year.

The “presidential election cycle” also provides reason for optimism. Since 1900, on average the stock market has advanced over 9% in Presidential election years (with an average of 6% since 1948). Averages can camouflage a great deal and the market performed poorly during both 2000 and 2008. However the upcoming US Presidential election and the Republican primaries have the potential to be among the most contentious in history, and could conceivably create challenges for the financial markets.

Japan and most of Europe are still enduring a slow recovery from the 2008 financial crisis and 2015 economic growth in the European Monetary Union (EMU) is estimated at an anemic 1% compared to 2% in the US. In contrast to the anticipated monetary tightening in the US, the European Central Bank and the Bank of Japan are expected to continue their monetary easing in an effort to improve those economies and financial markets. However Europe and Japan equities are attractively valued and should provide investors with opportunities for gains in 2016.

But the world is not without its risks. The European Union is suffering a massive wave of immigrants which has created much controversy and may impact future government elections and policy. This could lead one or more countries to threaten to withdraw from the EU, which would be disruptive to the financial markets.   Saudi Arabia and Iran have recently broken diplomatic relations and any armed conflict or significant internal dissension in one of those countries would be disruptive to both the oil and financial markets.

Why is the economy so sluggish? Most economists agree that the US and global economic growth is anemic, but there is no way of identifying a clear cause. Yet there are many theories. Increased regulation, rising government entitlement spending, the complex and costly US corporate and personal income tax system, increased globalization moving jobs off shore, an aging and slow growing population, and technological advances which have reduced the demand for unskilled employees are some common theories. Harvard Prof. Niall Ferguson believes that the global economy works best when there is a strong national global power to reduce conflict, and ensure freedom of the seas, but in 2013 the President said the US is no longer a global policeman. The benefit of Quantitative Easing by the Federal Reserve is also impossible to measure. Some economists believe it had no or minimal impact, while others feel it saved us from the “abys”.

The impact of immigration. The US birthrate is insufficient to maintain its current population level, and without immigration the US economy would likely decline. Over the years immigrants have made incredible contributions to the country. Albert Einstein emigrated from Germany), Elon Musk (founder of Tesla and SpaceX) emigrated from South Africa and Sergey Brin (co-founder of Google) emigrated from Russia are just a few. We are extremely fortunate that these and many others followed the path that most of our forefathers did in deciding to immigrate to the US. Hopefully in the future many more motivated and talented individuals will follow in their footsteps.

About the author

Pinnacle Investment Management: Pinnacle Investment Management, Inc. is a comprehensive investment management and financial planning firm committed to the financial future of our clients.

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