Markets In 2015: It Could’ve Been Worse

December 31, 2015

Today marks the close of a tumultuous year in financial markets. After bouncing around violently during the late summer, two of the three major stock indexes ended modestly lower, while the Nasdaq powered to more than a 5% gain.

The S&P 500, the most prominent U.S. index, dipped below last year's closing level of 2,058.90 today. The final print of 2,043.94 for 2015 gives it a 0.73% loss for the year, making it the worst annual performance for the stock market since 2008, when the index tanked 38.5% amid the financial crisis.

Given the troubles facing the market over the year, perhaps investors can take solace in the fact that stocks didn't perform even worse. From the slowdown in emerging markets to the plunge in oil and other commodities, to the first Fed rate hike in nearly 10 years, there was plenty for investors to worry about.

Oil Drops, Dollar Rises, Profits Shrink

In particular, the sharp decline in oil prices to their lowest levels since 2009 had a profound impact on earnings for U.S. corporations. Energy sector profits plummeted by about 59% in 2015, dragging overall S&P 500 earnings down with them.

The final numbers aren't in yet, but in aggregate, companies in the S&P 500 are expected to have seen a 0.7% year-over-year decline in earnings in 2015, according to FactSet. That's the first negative year for profits since the financial crisis.

Of course, bulls will argue that if you strip out energy, the numbers would be much stronger. That's true.

It's also true that without the drag from the surging U.S. dollar, profits would have been higher still.

The U.S. Dollar Index climbed 9% in 2015, which weighed on earnings for multinational corporations.

Small-Caps Underperform

Of course, when it comes to stocks, U.S. large-caps aren't the only game in town. The S&P 500 fared relatively well thanks to the outstanding performance of several prominent stocks such as Google, Amazon, Microsoft and Facebook.

On a total return basis (including dividends), the SPDR S&P 500 ETF (SPY | A-98) returned 1.3%. But smaller stocks didn't do as well.

The small-cap iShares Russell 2000 (IWM | A-92) lost 4.5% this year, while the SPDR S&P MidCap 400 ETF (MDY | A-83) shed 2.5%.

In an environment of higher interest rates and economic slowdown concerns, investors clearly favored large-caps over small-caps.

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