2015 was a frustrating year for investors. Both stocks and bonds experienced lots of ups and downs, but ended the year with very little to show for it. Continued economic growth gave us the gains, while questions regarding future growth rates, particularly around the world, gave us the losses.
Economic growth in the U.S. grew roughly 2.1% during the past year. While positive, GDP growth slowed late in the year. Strong employment gains throughout the year lowered the unemployment rate to 5%. Also in the U.S., strong consumer spending and continued debt reduction added to our economic growth. The other big economic news during the year was the FOMC raising the Fed Funds rate for the first time in nine years.
Most of the volatility in the markets this year, and the largest reason the markets were flat for the year, came from overseas. An economic slowdown in China, military uncertainties in the Middle East and Russia, and the ever present economic trouble in Greece all weighed heavily on the future outlook for our economy and the capital markets. All of these issues are a concern as we enter the new year.
We are generally positive regarding the U.S. economy for the upcoming year. We expect GDP growth rate to rise marginally over this year’s rate. We believe most of the drop in oil prices is behind us and a more stable outlook for oil should be a positive, although our outlook on this could change depending on how events unfold. We believe inflation will rise gradually, as will interest rates. Corporate earnings, which ultimately determine stock prices, are forecast to rise next year as businesses continue to recover from the Great Recession.
Our expectations for the stock market are also guardedly optimistic. Current earnings multiples are in the high normal range. While this gives us some downside protection, it likely also limits the upside potential of the market. As we said earlier this year, if there are surprises we believe they will be on the upside rather than the downside. It is, as always, very difficult to make short term predictions about the stock market. We also expect the bond market to have limited upside potential as interest rates move upward.
As we have said many times, the one certainty in investing is volatility and uncertainty. This year there have been more of both than in normal years. Longer term we believe the markets will continue to reward investors, and we try to focus on this rather than the year over year volatility. As always, please feel free to contact us with your questions or comments at any time. We would also remind you that our updated Form ADV is available upon request.