2015 was an underwhelming year for US equities, with the S&P 500 index generating a total return of 0.75% in US Dollar terms, the weakest since 2008. This ended three years of double-digit gains for the index, but was far better than the near 40% dive it took during 2008. A continuing slump in energy prices, anticipation of rising interest rates, and weakness in the Chinese economy were among the factors contributing to the market volatility in 2015. That said, there was some variability in terms of sector performance.
As in the previous year, the energy and materials sectors were the largest detractors to performance in 2015, with the S&P 500 energy and S&P 500 materials indices falling 21% and 8%, respectively. The energy fall was obviously connected to the continued decline in the crude-oil price, which was down nearly a third in 2015, hit by a combination of weak global demand and oversupply due to OPEC reluctance to cut production.
Seven of the S&P 500’s top ten losers for the year were energy companies, led by Chesapeake Energy Corp, Consol Energy, and Southwestern Energy, all down more than 70%. The materials sector underperformed as renewed worries about slower growth in China pressured commodity prices. The prices of gold, silver and copper slid to six-year lows in 2015, negatively affecting mining & metals companies such as Freeport-McMoran and Alcoa.
Utilities Also Dragged Down Market
After a strong 2014, the S&P 500 utilities index was down almost 5% in 2015, the first time since 2008 that utilities posted a negative return in a calendar year. Most of the underperformance came during the first half of the year, when rising interest-rate expectations and overheated valuations contributed to a double-digit drop between late January and mid-summer. But with higher interest rates mostly priced into utilities’ valuations, some pockets of value developed during the second half of 2015.
The S&P 500 industrials index also fell 2.5%, as the strong dollar, commodity weakness, and sluggish world trade growth negatively affected industrial stocks. Engine maker Cummins, railroad operator Union Pacific and machinery maker Caterpillar all pulled the sector lower.
Consumer and Technology Stocks Provide Tailwind
More positively, consumer discretionary was the best-performing sector in 2015, with the S&P 500 consumer discretionary index returning 10%. The sector was driven by big gains from Netflix and Amazon, each up more than 100% for the year, while Starbucks, Cablevision and Expedia also did well. Netflix surged from a $20bn market capitalisation to more than $50 billion in 2015 on the back of dramatic subscription growth at home and internationally, driven by a growing original content portfolio.
Amazon significantly exceeded its earnings expectations over the year as it benefitted from the company’s dominant position in online retailing and very strong growth in the cloud services division. The S&P consumer staples index was also up 6.6%. Even though shares of Wal-Mart had their worst year in four decades, the sector benefited from names such as Hormel Foods, Monster Beverage and Corona distributor Constellation Brands, as well as the merger of Kraft and Heinz.
Healthcare stocks rose thanks to gains in drug companies, such as the macular degeneration drug maker Regeneron, and Botox maker Allergan, which merged with Actavis early in the year. As the US presidential campaigns pick up full steam, the political rhetoric on lowering drug prices will probably continue and may affect sentiment towards the sector, though Morningstar analysts don’t expect any major change in US drug prices over the next several years.
Technology, the largest sector in the S&P 500 index, was also a solid performer, with internet names such as Facebook and Google’s parent company Alphabet, making significant gains. Video game makers Activision Blizzard and Electronic Arts also did well, while Microsoft reached its highest price since the 2000 boom following changes to its senior leadership team.
Which Funds Delivered Top Performance?
In terms of investment style, large-cap growth funds had the best performance in 2015, with strong returns from internet behemoths Facebook, Amazon, Netflix and Google (FANGs) – four of the most popular and best-performing technology stocks in recent years, powering the category. Funds with a lot of exposure to these four stocks mostly did well last year. For example, Morningstar Silver-rated T.Rowe Price Blue Chip Growth and T.Rowe Price US Large Cap Growth, as well as Bronze-rated Loomis Sayles US Equity Leaders all finished the year with top-quartile performance by owning FANG stocks among their top 10 holdings. Conversely, small-cap value funds had a tough time last year.
Some of the worst-performing small-cap value funds included Morningstar Silver-rated Legg Mason Royce US Small Cap Opportunity and Bronze-rated Legg Mason IF Royce US Smaller Companies, which suffered from exposure to cyclical and commodity-related areas, as this is where the managers found value, and a lack of exposure to biotech and pharma companies, which they avoided due to rich valuations.
This article was originally published in International Adviser magazine
