The Year That Was - US Stocks - Rate Chatter, Commodity Slump Stall Bull Rampage

(RTTNews) - The Fed's dilly-dalliance and commodity slump were the major themes in the markets for much of the year. That said, solid economic evidence that set tongues wagging about the beginning of interest rate normalization did have a salubrious impact on the markets, pushing the major averages to all time highs in the middle of the year.

The Dow Industrials hit a record closing high of 18,312 on May 19th, 2015 and S&P's tryst with a record high was on May 18th at 2,129. The Nasdaq Composite made it to the milestone, roughly two months later on July 20th, when it closed at 5,219.

Economic Brief

Rate hike chatter began to gain ground, as economic numbers continued to raise hopes for a sustainable recovery. The economy expanded at a fairly decent clip for much of the year, although the run rate has been running below trend for ten consecutive years now. After starting out with 0.6 percent sequential growth for the first quarter, the economy picked up momentum in the second quarter. The 3.9 percent growth in the second quarter followed a slowdown in the pace to 2 percent in the third quarter.

Contribution by consumer spending has been robust at 2.04 percentage points in the third quarter, with the metric rising 3 percent quarter-over-quarter. Gross private domestic investment has also remained resilient, although in the third quarter spending on structures deducted from growth.

Government spending is picking, while inventories have seen a see-sawing trend. Reflecting softer global growth, net exports rose a mere 0.7 percent in the third quarter and trimmed overall growth by 0.26 percentage points.

The health of the labor market, which clinched it in favor of a Fed rate hike this year, has been commendable. Notwithstanding domestic and overseas risks, the economy has been adding jobs at a brisk pace. In November, non-farm payrolls expanded by 211,000, with the average pace of job addition for the year at a healthy 210,000.

As yesterday's data shows, consumer confidence has been holding up. After peaking for the year in Spring, confidence has waned slightly, although it could still be termed as healthy.

Wells Fargo sees continuation of the positive economic growth trend, with a slight 2.6 percent uptick in the U.S. GDP growth, with the global economy expected to expand at a 3.5 percent rate.

Commodity Bashing

Commodities headed southward this year, with China's moderating growth and the lukewarm global growth outlook, fraying the nerves of the traders. China is in crossroads, as the nation shifts focus from export-dependent growth to domestic demand driven growth. The torrid growth pace the nation witnessed for much of the decade came under pressure in the transitional phase.

Crude oil suffered another down year, pressured by muted demand outlook and oversupply concerns. With Iran settling its nuclear standoff with the West, the fear of additional oil coming online aggravated. Added to that, the reluctance of OPEC to tamper with its production quota and the sub-par global growth amid abounding macroeconomic and geopolitical risks pushed the commodity steeply lower yet again this year. Oil futures fell about 31.5 percent this year.

Equities Vs. Other Classes

Asset Classes Returns (in %)

Equities (taking S&P 500 Index as proxy) +0.22 Bonds(10-year bonds) +9.52 Commodities(CRB Index) -23.95

As evident, the returns of most asset classes haven't been healthy and equities have been a middle-of-the-road choice, as they have withstood the generally lackluster appetite towards risky asset classes.

Sector Analysis

Among the major industrial groups, energy, material, utility and financial stocks generated negative returns for the year. Meanwhile, consumer discretionary stocks were stand out performers, deriving strength from stocks such as Amazon (AMNZ) and Netflix (NTFLX).

Gainers (as of December 30, 2015)

Consumer Discretionary : +9.50 percent Healthcare : +6.16 percent Technology : +5.78 percent Consumer Staple : +4.93 percent

Losers

Energy : -23.81 percent Material : -9.66 percent Utility : - 7.41 percent Industrial : -4.08 percent Financial : -2.59 percent Telecom : -0.75 percent

Among the 30 Dow Jones Industrial Average blue chips, American Express (AXP), Caterpillar (CAT), Chevron (CVX), IBM (IBM), Wal-Mart (WMT), Exxon Mobil (XOM) and United Technologies (UTX) were among the double-digit decliners. Apple (AAPL), the technology spearhead, was down 1.12 percent for the year.

Meanwhile, resisting the volatility, Boeing (BA), Disney (DIS), General Electric (GE), Home Depot (HD), McDonald's (MCD), Nike (NKE), Microsoft (MSFT) and UnitedHealth (UNH) came out with flying colors during the year.

Way Forward

The equity markets for one can take comfort from expectations that the Fed will adopt a gradual approach in raising interest rates in 2016. Wells Fargo analyst Sean Lynch expects earnings of companies to improve steadily in 2016, with consumers remaining on a strong footing to drive other sectors. He also believes that energy sector comparisons will improve after the first quarter.

Tracking the current bull market that has been on since 2009 post the recession-pick up, Wells Fargo notes that investors may be well advised to remain cautious as the bull market ages. Fewer and smaller rate increases by the Fed in 2016 and lower rates elsewhere should do well to keep a lid on U.S. bond yields. Inflation is also seen to pick up in 2016 after flat lining in 2015.

Wells Fargo's Darrell Cronk expects equities to be supported in 2016 by a host of factors, including low interest rates, inflation between 1.5 percent and 2.5 percent, 2-3 percent GDP growth rate, improving auto and housing sectors, a healthy job market and cautious investors. The firm expects the S&P 500 Index to end 2016 at 2,230-2,330, with operating earnings reaching $130 per share.