2016 is shaping up to be a volatile year for financial markets. In order to get an understanding of how major asset classes will perform this year, let's review their performance in 2015.
Courtesy of Foundation Investing; price data from Yahoo Finance
2015 was not kind to equities. The so-called "FANG" stocks, which consist of Facebook, Amazon, Netflix and Google (now Alphabet) were the only high-profile gainers. Investors bought them in size at the beginning of the year and rode them all the way up. We tried to hop on the same momentum train but exited at break-even when we didn't see enough follow through by year end. Despite the success of FANG's, most index investors lost. Even a majority of high-profile hedge fund managers struggled in 2015. Billionaire investor Bill Ackman's Pershing Square Holdings finished down 20.5% for the year. And Warren Buffett's Berkshire Hathaway lost 12%.
Treasury securities lost money as well. With low interest rates and a Federal Reserve tightening cycle at the top of everyone's mind, bonds have had a hard time breaking out.
The fall in the junk bond market was not a surprise. Plummeting oil prices have killed a lot of energy companies, and now they're struggling to service their debt. Further downside and defaults are likely. To make matters worse, many investors were pressured a few years ago to buy into junk bonds to increase the yield on their portfolios. Instead of earning 1% - 2% on government bonds, they "reached for yield" and bought junk. These investors, hands forced by the Fed's zero interest rate policy, are all underwater. Watch for even more of them to puke at the lows. We look forward to digging into the long side of this battered debt market when the dust settles. There will definitely be some quality buys at bargain prices.