Rising Volatility & Stagnant Returns: What I Got Right (And Wrong) In 2015 by Russ Koesterich, CFA, BlackRock
Keeping with his annual tradition, Russ compares the year that was to the year that he expected.
This year was distinct for two, contradictory reasons: rising volatility and stagnant returns, at least in the United States.
This was the year when volatility finally spiked after years of quiet markets. Yet, 2015 was also a year when, despite all the volatility, most U.S. stock market measures ended the year just about where they started.
Paul J. Isaac's Arbiter Partners returned -19.3% in the third quarter of 2021, according to a copy of the hedge fund's quarterly investor correspondence, which ValueWalk has been able to review. Following this performance, the fund's return sits at -1.6% for the year to the end of September. In comparison, the S&P 500 returned 15.9%, Read More
According to Bloomberg data, U.S. equities, as measured by the S&P 500 Index, barely budged; long-term U.S. Treasury rates are currently trading within 10 basis points (bps) of where they were on January 1; and, with the exception of the last two weeks of the year, the Federal Reserve (Fed) sat on its hands. To quote Macbeth, for many U.S. assets, 2015 was a year of “sound and fury, signifying nothing.”
What Went According to Plan
My basic view that 2015 would be a year of modest U.S. growth, low U.S. inflation and contained U.S. rates turned out to be true. Despite a stellar second quarter, the U.S. economy never broke out as many expected.
I expected that dollar-hedged returns for European and Japanese equities would be better than stock market returns in the United States. In actuality, according to data accessible via Bloomberg, European equities, as measured by the S&P Europe 350 Index, modestly outperformed the broader market, while stocks in Japan, represented by the MSCI Japan Index, had another strong year.
Within stock sectors, my expectations for a strong year for technology and a weak one for utilities were largely realized. Outside of stocks, I had expected a strong dollar, weak commodities and the relative outperformance of tax-exempt bonds. All played to script.
What Was Sort of in the Ball Park
Many of my calls were less accurate in magnitude than direction. While rates remained constrained, I had expected the yield on the 10-year Treasury note to end the year between 2.5 percent and 2.75 percent, not 2.25 percent.
I also expected the Fed to initiate liftoff earlier in the year, and not sneak in one, apologetic rate hike in mid-December. As with rates, I was too optimistic on U.S. equities. While I expected a soft year, my expectation was for mid-single digit gains, not a flat year.
What Was a Total Miss
This leaves the big misses, starting with high yield. While high yield didn’t experience a 2008-style meltdown this year, it did struggle, experiencing negative returns and more volatility. I had assumed high yield would enjoy one more year of relatively decent returns. I didn’t foresee the collapse in oil and its impact on high yield issuers.
Speaking of oil, while I was negative on commodities, I will also put this one in the “miss” column. Coming into the year, my expectation was for oil to remain low, but range bound. I assumed the lower end of that range would be around $50 per barrel, not $35.
Finally, while I had modest expectations for emerging market (EM) assets, I certainly missed the latest meltdown in EM currencies, many of which have been depreciating faster than during the financial crisis.
The Biggest Surprise
I should also note my biggest surprise. While I didn’t have an explicit forecast on European sovereign debt, I admit that I completely missed the possibility that by the end of 2015, 40 percent of the European sovereign debt market would be trading at a negative yield. I didn’t consider that investors would have to pay Germany for the privilege of loaning it money for five years.
In summary, my misses all had a common flavor: Returns were generally outside the range that seemed reasonable at the start of the year. Underestimating the range of potential outcomes is one of the most common of forecasting errors, and one that I was guilty of in 2015. This is something I’m taking to heart as the bull market ages another year.