Why Wall Street’s Down Year May Not Be As Worrisome As You Think

December 31, 2015, 8:25 PM UTC
Last Day Of Trading At The NYSE As US Stocks Edge Lower, Pulling S&P 500 Into Red For The Year
Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Thursday, Dec. 31, 2015. U.S. stocks declined, with the Standard & Poor's 500 Index losing its grip on a fourth consecutive annual gain in the year's final trading session amid a slide in technology and consumer staples shares. Photographer: Michael Nagle/Bloomberg via Getty Images
Photograph by Michael Nagle — Bloomberg via Getty Images

For investors, 2015 will be remembered as a year of disappointment.

The stock market fell on the last trading day of the year, ending the year in the red for the first time since 2008. The Dow Jones Industrial Average dropped slightly more than 178 points, closing the year at 17,425. For the year, the widely watched index was down nearly 2%. The S&P 500 was also down on the last trading day, ending the year down just a few points from where it started.

The disappointment wasn’t confined to just stocks. There weren’t a lot of places to get investment returns this year. The Barclays Global Aggregate Bond index was down 3.3% in 2015 through Dec. 30. U.S. bonds did better, but only slightly, up 0.45% for the year. Commodities prices were also down 25% for year. The price of gold fell for the third year in a row. Prices of high yield bonds, which have been a concern recently, were also down. The price of the SPDR Barclay’s High Yield Bond ETF (JNK) was down nearly 12% on the year.

There were a few bright spots. A handful of technology stocks did well. The best performing company in the S&P 500 was Netflix (NFLX), with its shares rising by 135% for the year.

And unlike in 2008, this year’s market drop is likely less worrisome than it appears. First of all, energy companies in the S&P 500 fell nearly 25% during the year, making them by far the worst performing sector. Without energy, the S&P would have had a positive year. On the other hand, consumer discretionary stocks were up 9%, making it the best performing sector in the market this year. In general, the U.S. economy is driven by consumer spending.

What’s more, the drop in stocks in 2015 had more to do with the lofty prices they started the year at than the economy. Even after this year’s stock market lull, the S&P 500 still has a price-to-earnings ratio of 16 based on next year’s earnings. That’s high relative to historic averages, meaning investors are still willing to pay up for stocks, a display of optimism.

One of the big concerns is corporate profits. The earnings of the average company in the S&P 500 fell slightly in 2015. But earnings growth is expected to rebound in 2016, with a predicted average bump of 7% next year. Still, large U.S. companies will see a headwind from overseas markets. The drop in oil prices for the second year in a row, and low commodities prices in general, suggests the global economy remains weak.

The Federal Reserve raised short-term interest rates for the first time in nine years in 2015. That is a worry for markets, which generally do better when interest rates are falling. But it could also be a sign that the economy is improving, as long as the Fed has timed things right.

Just the same, the rockiness of the market this year suggests that investors are more worried about what’s in store for the coming year than they have been in a long time.

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