Fourth Quarter 2015 Market Review
Having finally taken the plunge to initiate a cycle of rising interest rates, the question uppermost on many investors’ minds is whether or not the Federal Reserve will follow through and continue to raise rates over the course of 2016. While the recent performance of the US economy is less than uniformly supportive, policy makers indicate that they believe it is strong enough to support increasing rates.
But there is more to consider than just the domestic economy. As you know, with the advent of the internet, instantaneous global communications, and increased cross border trade, no single country is immune to what is going on in the world around it. We have seen a significant slowdown in the growth of the Chinese economy, collapsing commodity prices (particularly oil), and a startling drop in international freight rates and traffic. On top of these fundamental issues, there are political issues including terrorism and huge immigration flows into Europe (and the US).
Interestingly, the Fed is caught in something of a lose – lose position from a market perspective. If it continues to raise rates, investors may view that as too much of a headwind for securities prices. On the other hand, should the Fed back down from rate increases, that climb down may well be interpreted as a lack of confidence in the economy, both at home and abroad. One thing that we can be reasonably sure of is that, should the Fed continue on its course toward normalization of interest rates, the necessary increases will be slow. Under either scenario, a low rate environment is expected to persist for some time.
The stock market repeated its August swan dive in December driven primarily by declining oil prices and China fears. This drop, unfortunately, was not enough to enable your Rydex fund holding to remain above its end of September value. For the quarter, it fell 7.34% and 4.39% for the full year. Fixed income holdings also show a negative yearly return of 0.66%. This reflects the effects of the rate increase as well as investor aversion to anything but the very highest quality issues.