Another year in the books!
The SP 500 and TSX Composite fell 0.7 per cent and 11.1 per cent, respectively in 2015. There's an old saying that investing in stocks is like walking up a never-ending staircase with a yo-yo, but 2015 was more like running on a treadmill for investors in the U.S. market - a lot of energy spent, but no ground gained. For all the ups and downs, the SP 500 went essentially nowhere from where it started the year. Unfortunately, the TSX Composite fared much worse as oil and the rest of the commodity complex weakened further.
Indeed, it was a tough year for most money managers on both sides of the border, but it was also a have and havenot type of market. Sector selection was paramount as some sectors did well, while others plummeted.
The energy and materials sectors had one of their toughest years yet in Canada, down 25.7 per cent and 22.8 per cent, respectively. I have generally been bearish on the materials space for several years now and stepped away from energy stocks in 2014. By avoiding these two sectors, you would have saved a great deal of pain that, unfortunately, many Canadians are still experiencing. 2015 was a prime example of how it's often more important what you don't own (hopefully that was energy and materials last year) than what you do.
There are a few explanations for why the market was less than stellar last year. Canada was all about commodities continuing their slide. Resources have a much heavier weighting in the TSX Composite than the SP 500 and a much bigger impact on the Canadian economy. That's why Canada went into a technical recession in the first half of the year and why the Bank of Canada cut interest rates - twice!
The U.S. economy continued its pace of moderate growth, but did face pressure from a slowdown in emerging markets. This is a direct result of commodity weakness. Consumer spending was solid throughout the year in the U.S., but the strong dollar hurt exports and overseas corporate earnings.
Corporate earnings are ultimately what drive stocks in the long run and at this stage in the cycle, earnings growth is what moves stocks higher.
SP 500 earnings were saddled by a surging U.S. dollar and a collapse in the energy and materials sectors. So it's not at all surprising that flat earnings led to a flat market, but keep in mind these two factors are transitory. The U.S. dollar can't rise against all currencies forever and earnings in the energy sector are expected to rebound at some point
With 2015 behind us, let's look to 2016. In the spirit of avoiding grand predictions, I'll refrain from making them here. But, I do generally see corporate earnings growth bouncing back, the U.S. economy continuing to improve and the Fed maintaining its accommodative stance.
If I'm anywhere near the mark on that, 2016 should be a good one for investors. If that outlook changes for better or worse, it's important that investors adhere to an active investment strategy as markets change and adjust their exposure to equities if markets remain volatile.
Lori Pinkowski is a senior portfolio manager and senior vice-president, Private Client Group, at Raymond James Ltd., a member of the Canadian Investor Protection Fund. This is for informational purposes only and does not necessarily reflect the opinions of Raymond James. Past performance is not necessarily indicative of future performance. Lori can answer any questions at 604-915-LORI or [email protected]. You can also listen to her every Monday morning on CKNW at 8:40 a.m.
