Commentary | 4Q 2015

In the fourth quarter, the rise of the market as represented by the S&P 500 Index, brought the market close to a positive return for the entire year. With the inclusion of dividends, the Index achieved a small positive return for 2015. The Index’s rise seemed unrelated to any improvement in the economic environment, or improvement in the outlook for corporate profits. Economic indicators pointed to an economy growing at a rate below expectations, and the outlook for profits in the near term called for more disappointment.

At the beginning of the quarter, the consensus for economic growth fell in a range of 2.5% to 3.0%. Preliminary estimates indicated the actual rate of growth for the overall economy fell below 2.0% during the quarter. The causes for the shortfall are the subject of much speculation. The rate of growth of the U.S. economy has been disappointing for almost seven years; therefore, it is hard to establish a credible causal relationship between recent data and a slowdown.

In December, the Fed announced a 25 basis points increase in the Fed Funds rate. This increase was anticipated. The increase and the Fed’s comments at the time of the increase raised the issue of further rate hikes. The new Fed Chair and the Fed’s actions have raised the uncertainty attached to any forecast for economic growth.

Expectations for economic growth overseas have been lowered significantly.  If these expectations are accurate, then those companies with a substantial exposure to non-U.S. economies will have a difficult time growing profits.

The ability of the stock market to generate satisfactory returns will be a function primarily of the rate of growth of economic activity in the U.S., and the rate of growth of profits. Economic growth overseas and the changing expectation for growth will shape stock returns to some extent. The capriciousness of economic policies in some countries will add uncertainty to any forecast for both economic growth and the growth in profits in these countries. The economic policies of the U.S. are not lacking capriciousness, but they are bounded to a greater degree than those of many other countries. The possible actions of the Fed are the primary sources of uncertainty for any forecast for economic growth in the U.S. If the Fed does not destabilize the economy, economic growth in the near term should approach 2% at an annual rate, and corporate profits should grow modestly.