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Dear Client:

The S&P 500 finished 2015 with a whimper, dropping 19.42 points in New Year’s Eve trading. Today’s action was a befitting end to altogether forgettable year for the equity market. The S&P 500 finished the year with a loss of 14.97 points, or -0.727% excluding dividends. If you spent 2015 on Venus or maybe in North Korea, you could be forgiven for thinking it was a boring, flat year in the market. It was anything but boring and flat, particularly in the latter half of the year. Markets meandered along in a narrow trading range until August, when things took a nasty plunge because of fears that the Chinese government had lost control of their economy and stock market. After a brief bounce, the market dropped again to the August lows to “test” investors’ fortitude, as we said in our September letter. As we noted then, pessimism was at an extreme high, and fortunately we were correct in predicting a near term recovery. Unfortunately, it was not enough to lift the market into positive territory for the year.

The Summer/Fall Swoon was not the only source of investor (and advisor) heartburn this past year. 2015 saw an extraordinary number of 1% up or down daily moves in the S&P 500. And the “breadth” of the S&P 500 was terrible in 2015, with a small group of supercharged high-flyers (Facebook, Netflix, Amazon, Google) overshadowing broad weakness across large sectors of the market. Here is how the ten sectors of the S&P 500 did in 2015:

Source: Thomson Reuters

The dominant story for the market in 2015 began about thirteen months ago, right around Thanksgiving 2014. OPEC had their semi-annual meeting, and Saudi Arabia surprised the oil market by refusing to cut production. In fact they made a point of saying they were going to keep pumping oil at an elevated level, the market be damned. They did this for two reasons. One, they wanted to squeeze their main rival Iran, which had been causing all sorts of mischief in the region. More importantly, they were REALLY upset by a little phenomenon called the shale oil revolution. In the past decade or so North America has gone from being a little sliver of world production to the second largest producer of oil in the world, more than tripling production. The Saudis have a much lower cost of production—they just scratch the sand and the oil flows. The North American producers’ production costs vary, but generally it costs them $35-$50 a barrel to get a barrel out of the ground. Oil was trading at $94 a barrel in mid-2014 vs. $35 a couple weeks ago. This is a major problem for the domestic oil producers, many of whom borrowed billions of dollars through high-yield bonds, and need oil prices at much higher levels just to break even. Nobody wants to stop pumping oil, because they need the revenue so badly to pay their lenders. They need to pump twice the oil as a year ago to get the same revenue, which leads to a vicious cycle of more supply and lower prices. Something has to give.

The cure for low prices of any commodity is low prices. You can substitute “high” for “low” in this sentence and it still rings true. The Invisible Hand of the market is right now causing oil producers around the world to cancel billions of dollars of future investments in new and existing wells. Global exploration and production investments will fall by $170 billion in 2015 according to an article in the WSJ*. If oil stays below $50 it could fall by another 20% next year. Some analysts are predicting a supply crunch down the line, which could drive oil prices (and energy stocks) dramatically higher.

We can’t predict when this may happen, but something tells us the days of sub $2.00 gasoline are numbered. If and when this comes to pass, “The worst shall be the first”—in other words, as so often happens with investments, the worst performing sector (energy) will jump to the front of the pack. Therefore, we are not ready to throw in the towel on this critical domestic industry.

According to a recent Barron’s strategist survey, the experts’ year-end 2016 target for the S&P 500 cluster around 2200, or about a 7% return excluding dividends.** The seers project earnings for the S&P 500 in 2016 to rise about 5% from today’s $118 level. That would imply that the market is selling at about 16.5 times earnings, a level which is neither cheap nor expensive based on historical levels. A couple weeks ago the Fed raised interest rates 0.25% for the first time in nearly a decade. Even if the Fed raises rates every quarter in 2016 by this amount, which is by no means assured, it will be years before money funds or fixed income offer any compelling alternative to a diversified stock portfolio, in my opinion.  Of course, equities carry more risk than bonds or cash, as this year proved true. Over the long run, they also offer more potential for wealth accumulation.

Years such as 2015 are frustrating for investors, given that virtually nothing across the asset allocation spectrum “worked”. Statistically stocks rise about 2/3 of the time, which means that in about one out of three years, the opposite is true. But election years tend to be pretty good for stocks, as politicians like to keep their jobs. Let’s hope 2016 is a case in point.

Coming very soon…

After nearly six months of hard work, our new and improved GBR Wealth Management Website is about to go live! We are very excited about this new tool for us to communicate with our client base. We will forward you the new address soon. Please feel free to contact us with your thoughts and comments.

*WSJ 12/31/15 Money and Investing section

**Barron’s 12/14/15

Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance that trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Raymond James & Associates, Inc., Member New York Stock Exchange/SIPC