2015 Markets: Nowhere to Run, Nowhere to Hide

“2015 was the worst year for U.S. stocks since 2008” is the headline you are likely to see, but going by the numbers, it wasn’t that bad -- or was it? The S&P 500 was down by less than 1 percent, though including reinvested dividends, the index eked out a gain. Small caps fared worse, with the Russell 2000 falling nearly 6 percent, but the NASDAQ increased by 5.7 percent, so not so bad, right?

The real problem for disciplined investors who adhered to diversified asset allocation models last year was that there was simply “Nowhere to run to, baby, Nowhere to hide” (h/t Martha and the Vandellas). In fact, 2015 was only similar to 2008 in that many asset classes moved in tandem. If you recall Asset Allocation 101, the whole point is that when stocks zig, another asset class like commodities zags. Yet, the S&P 500 and the Nymex crude oil “both closed down on 87 out of 252 trading sessions in the year. That’s the most in any year since at least 1984”, according to data from The Wall Street Journal’s statistics group.

And if you are the type of investor who sprinkled a dash of the more far-afield asset classes to add a little spice to your portfolio, 2015 may have been far worse. In addition to the crushing performance of oil and commodities, the MSCI emerging equity index was down 17 percent in 2015, its fifth straight year of underperformance versus developed indexes, as the toxic trifecta of slowing growth in China, the commodity washout and a rising US dollar were simply too much for the index to bear.

Maybe you sought to juice up your fixed income return with riskier bonds last year. If so, that decision hurt. The Barclays US corporate high-yield bond index lost 4.5 percent, while longer-dated corporate credit for investment grade holdings, slid 4.6 percent. Had you simply stuck with a boring intermediate term bond index, you would have seen small gains on the year. According to data compiled by Bianco Research LLC and Bloomberg, a case can be made that 2015 “was the worst year for asset-allocating bulls in almost 80 years.”

Does that mean that asset allocation does not work? Perhaps you have a case of investor amnesia and forgot about the dreadful first decade of the 21st century. From 2000 to 2010, the annualized return of the S&P 500, including dividends, was just a paltry 1.4 percent per year. During that same time frame, the Russell 2000 was up 6.3 percent and MSCI Emerging Markets Index jumped 16.2 percent. And if you had owned bonds, your performance improved dramatically. During those ten years, a portfolio of 60 percent equities (split among different types of stocks) and 40 percent fixed income had an annualized return of 7.83 percent.

Does asset allocation work? Over the long term, YES!

2015 Market Performance

• DJIA 17,425: down 2.2%
• S&P 500 2,043: down 0.7%
• NASDAQ 5,007: up 5.7%
• Russell 2000 1135: down 5.7%
• Shanghai Composite 3539: up 9.4%, despite plunging 43% from its intra-day peak on June 12 to the bottom on Aug. 26
• Stoxx Europe 600 365: up 6.8%
• 10-Year Treasury yield: 2.273% (from 2.173% a year ago)
• US Dollar: up 9.3 percent
• Feb Crude $37.07: down 30.5%
• Feb Gold $1,060.50: down 10.7%, lowest since Feb 2010