My very best wishes to all investors for a Happy New Year. One of the best aspects of holidays is the chance to reflect on the past and plan for the future. It is the planning that is essential for profitable investing.
S&P 500 In 2015
The year started with the S&P opening at 2058.90 and predictions of at least 2300 for the S&P by the end of the year for a gain anywhere from 10% to 12%.
Instead the market managed to rise to 2134.72 by May 20 but continued to exhibit weakness. This weakness was exacerbated by China devaluing their currency in the face of a slowdown in economic growth. China had experienced double-digit growth for years only to find growth weaken in 2015 until statistics pointed to growth less than half of what had been expected. To shore up their GDP they devalued their currency, a strategy they had used in the past but this time it led to a huge sell-off in the Shanghai Composite Index. As well commodity prices plunged as demand from China and other nations dropped precipitously. This led to a plunge in late August in North American equities which took the S&P down 12.5% from its May 20 all-time high.
In the face of this decline, the price of oil also fell and OPEC nations, particularly Saudi Arabia continued to oversupply oil in a fight to protect their market share from shale oil producers. In an effort to force Shale Oil producers into bankruptcy, Saudi Arabia announced an end to any ceilings on oil supplies which by the end of the year tumbled oil to below $37.00.
The strength of the rise of the US dollar which surprised many analysts and currency traders dampened the enthusiasm for gold and other precious metals. With weakness dominant in 2015 the only investors who made money on gold in 2015 were those who bought the dips and sold into the rallies, as gold maintained a steady decline stuck in a bear market.
Gold bulls continued to point out that over the past 10 years gold is still up 83% from 2006 lows and from 2006 to the highs of August 2011 gold moved up 249%. However the decline in gold has been steady with a drop of 45% since August 2011. For 2016 gold continues to look weak and appears ready to break below $1000 an ounce.
US Dollar Strength
As much of the world has seen their economies slow, the United States continued to show resilience and defied the global community by increasing their employment to levels not seen since the 1970’s and managing to grow their economy beyond most expectations, even though GDP was still low.
The strength of the US dollar was a result of this growth. The dollar rose against currencies of all trading partners including the Euro, Yuan, Yen, Ruble, Aussie and of course the Canadian Dollar which fell 17.4% in 2015.
The rise of the US dollar and slow global economic growth, lead to a collapse in most commodities including but not limited to minerals which hit the mining and resource sectors hard, particular in Canada where about one third of the entire Toronto Stock Exchange is connected to commodity driven stocks.
Toronto Stock Exchange Decline
This has led to a decline of 18.7% from the TSX all-time high of 15,524.75 set in mid-April 2015. The decline has placed the TSX into a bear market but many stocks, particularly resource based stocks have been hurt far worse in 2015.
Many political events also made their presence felt on the markets including the invasion of Crimea (2014-15) and Ukraine (2014-15 War in Donbass) by Russia, terrorists’ attacks in a number of countries including France and the United States and international war with ISIS in both Iraq and Syria. Other events included Greece electing a leftist prime minister and voting NO to a bailout deal which was ultimately accepted despite the national plebiscite result of NO.
US Interest Rate Hike
In the US, the Federal Reserve finally raised interest rates a quarter of a percent in December. This kept the markets on edge for much of the year and may have been partly responsible for any rallies in 2015 failing to maintain new highs. Since the introduction of the interest rate hike, investor focus has now shifted to when a second hike might be expected with most analysts believing March will be the next month for another interest rate increase.
All About Strategies
When you consider the many factors which have continually undermined stocks this year, it is perhaps surprising that the US indexes are not lower. Politically this has been a busy and often negative year. Economically, much of the world appears as if they are stumbling into or towards a recession at some point in 2016.
Returns in the stock market this year have been quite good for my portfolio but not because stocks did well, but instead because strategies were used to take advantage of the sideways action of the market direction. This sideways action in 2015 proved ideal for strategies such as the Weekly Wanderer Strategy, Hide and Seek Covered Calls and Home on The Range Strategy which pinpoints entry and exit prices for trading range bound stocks and ETFs. I am not a big believer in buying and holding stocks indefinitely. Sideways years like 2015 are more common than many investors realize. By using options strategies with stocks I can earn above average returns while continuing to protect my portfolio from losses. This year is a perfect example of the power of using options to earn income while stocks wandered throughout much of the year.
2016 promises to be an equally volatile year for stocks. Many of the political and economic issues we saw in 2015 have not been resolved. Oil prices continue to look weak as do most commodities. The US dollar is still strong and interest rates could rise further in the USA. Terrorism remains a threat and the economic slowdown in China continues to not only worry economists, but is hampering growth in many other countries. Europe continues on a path of Quantitative Easing at a time when the Federal Reserve is withdrawing liquidity from their markets.
2016 will be another year when strategies that combine options with stocks may end up being one of the few methods to earn income and above average returns. I plan to continue to trade using my strategies. I also plan to continue to keep about 30% of my overall portfolio in cash, to take advantages of strong pullbacks, corrections and what could be a bear market in 2016.
No one can predict what 2016 will bring for investors, but I do know that having a plan is essential to the success of investing in today’s stock markets.
My very best wishes for a Happy New Year and all my best for a prosperous and safe 2016.