Saying stocks had 'their worst year since 2008' only tells a tiny part of the story

We reached out to Mohamed A. El-Erian, a Business Insider contributor, to ask for his assessment of financial markets in 2015. He responded with these 10 points, reminding us of the evolving influence of central banks in a world of growing policy divergence, decelerating global growth, and record M&As.

1. While a few newspapers led their end-of-year reporting with the correct observation that US stock markets had “their worst year since 2008,” this assessment could prove overly partial in a number of ways.

Most importantly, it obfuscates the fact that markets in this country, assisted by a bumper year for M&As and share buybacks, navigated quite impressively an unusual mix of potentially damaging headwinds: from the marked slowdown in global growth and reduced monetary stimulus from the Federal Reserve to geo-political threats, risk and leverage over-extension, and the emergence of anti-establishment movements that added to the polarization of the two traditional parties and further paralyzed comprehensive policy making.

2. The numbers for the year as a whole also obscure the notable two-way volatility investors experienced in the course of 2015. This includes a rather scary few weeks in late summer which, to render things even more unsettling, saw the Dow precipitously collapse by 1,000 points shortly after trading opened on August 24 — the so-called flash crash. And during these periods of particularly sharp stock market movements, be they higher or lower, many prices tended to overshoot in the context of strained market liquidity, contagion, and quite unusual correlations among different asset classes.

3. Sector and country exposures mattered quite a bit in 2015. Within an essentially flat S&P 500 for the year (specifically, down only 0.7%), six of the 10 sectors ended in negative territory, with a particularly sharp decline for energy (down by almost a quarter). Meanwhile, automobiles and retail climbed 8%. Concurrently, this more-comprehensive of the widely followed indices trailed the tech-heavy NASDAQ which returned almost 6%. And both under-performed stock markets in other advanced economies, including the German DAX (up 10%) and the Japanese Nikkei (9%).

4. The international dispersion in market performance was, in part, a reflection of the growing divergence in central banking within the advanced world. In contrast to the Fed (which had exited QE before the year started and, last month, hiked interest rates for the first time in almost 10 years), the Bank of Japan and the European Central Bank increased their monetary stimulus in 2015, expanding their support for financial markets. As such, their out-performing stock markets were accompanied by global currency fluctuations, including a 10% depreciation in the Euro.

5. Additional central bank stimulus also helped the Chinese stock market which ended the year up 9% despite a series of growth scares for this systemically important economy. But it got there in an extremely volatile fashion, having registered a gain of over 50% earlier in the year.

6. China’s positive performance was insufficient to lift the stocks of the emerging market asset class as a whole. Indeed, many developing economies had a hard time coping with the slowdown in global growth, the divergence in the advanced world’s central bank policies, and patchy global market liquidity. And those facing additional domestic challenges, such as Brazil, got hit particularly hard.

7. The impact of central banks was also clear in the bond markets of advanced economies — be it in the flattening of the US yield curve (where shorter maturities went up in yield while the 10-year was broadly unchanged) or in the record negative yields on quite a range of European government bonds.

8. Central banks were less influential when it comes to commodities. There, virtually every component was pressured by lower demand as global growth decelerated. Some commodities also suffered from excess supply. And, in the case of energy, the change in oil’s “swing producer” regime added to the dislocations, chopping a third off the price as OPEC exited the business of trying to stabilize prices on the way down.

9. It is one thing to suffer volatility; it is another to become unhinged — and that is what happened in particular to three market segments during the year: oil, high yield corporate bonds (also known as junk bonds), and emerging market currencies. All three fell victim to horrid technicals that fueled nasty price overshoots and essentially nullified the anchoring role of fundamentals.

10. All of which leads us to prospects for 2016. With less uniform support from central banks in advanced economies, the continued deployment into the equity markets of corporate cash — through additional share buybacks, higher dividends, and new M&A deals — is unlikely to be sufficient to isolate investors from economic, political and geo-political turbulence.

Greater financial market volatility is to be expected, with improved fundamentals needing to do a lot more of the heavy lifting if risk assets are to avoid a disappointing year in aggregate. Meanwhile, name selection (from both the long and short side) will be even more important for return generation, especially when it comes to exploiting the quasi-inevitable bouts of market overshoots, contagion, unpredictable correlations, and unhinged segments.

This post originally appeared on Business Insider.