Rarely has it taken so much to do so little.
After enduring the worst selloff in four years and volatility not seen since the financial crisis, the Standard & Poor’s 500 Index ended 2015 just fractionally below where it began, down 0.7 percent at 2,043.94. The decline, sealed on the last day, broke a three-year streak of annual advances that fizzled as the Federal Reserve raised interest rates, valuations jumped and commodities plunged.
While stocks fell, it wasn’t enough to end the bull market that has restored $15 trillion to U.S. equity values since 2009 — it would take a peak-to-trough tumble of 20 percent to do that. Instead, investors were reminded that the steady gains that characterized the previous three years in American equities couldn’t last forever, particularly at a time when corporate profits are falling.
“We’ve gotten pretty spoiled by low volatility and investors got used to it, but that’s just not the norm,” said Paul Zemsky, head of multi-asset strategies at Voya Investment Management LLC, which oversees $210 billion. “Volatility returning to the market is consistent with us moving away from quantitative easing and in a fully valued market.”
Volatility was the rule in a year in which the number of days when the S&P 500 rose or fell 1 percent almost doubled from 2014 and the proportion of stocks posting losses increased to the highest level since 2008. The Dow Jones Industrial Average slipped 2.2 percent while the Nasdaq Composite Index climbed 5.7 percent.
After dropping as much as 12 percent from an all-time high in an August rout and posting 72 days when moves exceeded 1 percent, the S&P 500 turned in its worst calendar year since 2008. At its current level, the index trades for 22.5 times reported earnings, higher than the end of nine of the past 10 bull markets, according to data compiled by S&P Dow Jones Indices and Bloomberg.
It was the second time in five years that the S&P 500 posted an annual price return of less than 1 percent, the first being 2011, when the gauge fell 4 one-hundredths of a point. Turbulence swirled below the surface then, too: the last time the Chicago Board Options Exchange Volatility Index averaged more than it has in the second half of 2015 was in 2011, when Europe was coping with its sovereign debt crisis.
The average difference between the highest and lowest points touched by the S&P 500 each day in 2015 was 23 points, the most since the global financial crisis. Daily swings picked up after China devalued its currency and oil completed its biggest two-year slump on record.
“The amazing thing to me is not that it didn’t go up, but that the market didn’t go down,” said John Manley, who helps oversee about $233 billion as chief equity strategist for Wells Fargo Funds Management in New York. “If I went through the litany of all things that could have taken the market down, at the end of the year, the amazing thing is it didn’t go down. That gives you some sense of the resiliency.”
As market swings widened, volatility-linked instruments betting on increased price swings lured more money from investors. Shares outstanding in the VelocityShares Daily 2x VIX Short Term ETN, a security that appreciates as turbulence increases and is often used as an equity market hedge, rose more than 300 percent, while net flows into the fund totaled $347 million for the year.
At the same time, in a sign of how confused investors were in 2015, an ETF that becomes more valuable during times of market tranquility also drew interest in 2015. The VelocityShares Daily Inverse Short Term ETN saw shares outstanding climb 34 percent during the year as the security attracted $108 million in inflows.
For more contradictions, consider consumer discretionary shares in the S&P 500, the group whose 8.4 percent advance in 2015 was close to double the next-closest industry. The sector did well, but among its members, five were among the 20 worst performing companies in the S&P 500. Twelve of the 14 others were in energy or commodities.
All counted, 284 companies in the S&P 500 were down for the year. While the index is about 4 percent below its all-time record reached in May, the average stock is 17 percent from its 52-week high.
Mega-cap stocks, such as Microsoft Corp., Amazon.com Inc., and Google’s parent Alphabet Inc. buoyed the market. The 10 biggest companies were up an average 21 percent this year. Small-cap shares trailed their larger peers for a second year, a stretch not seen since 1998, as the Russell 2000 Index declined 5.7 percent.
With breadth narrowing, the strategy of buying a whole basket of stocks tracking the market or an industry has mostly suffered. Among more than 300 exchange-traded funds that have at least $100 million in assets, 53 percent lost money in 2015, data compiled by Bloomberg show.
“It wasn’t a boring year, by any means, even though the result is rather boring,” said Richard Sichel, chief investment officer at Philadelphia Trust Co., which oversees $2 billion. “A lot happened to end the year flat.”
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