If you build it, they will come. Such was a central theme for years in China as they rush to build urban communities for the continued rural migration of their population. While ghost cities describe an abandoned city after a rapid growth (much like the western gold towns of the U.S.), Chines ghost cities are different in that they have yet to reach their peak but rather offer an underutilized city built for expected growth. The jury is out yet as to whether the cities will live up to their potential although some have filled with residents faster than expected. Thames Town modeled after an English countryside is one example of a unique city built for urban expansion. It has offered many a tourist photo op but attracted only a sparse number of full time residents from nearby Shanghai to date.
As the ghost cities indicate, the Chinese economies rapid growth has come down quite a bit in the last year. The Hang Seng index, a barometer of Chinese equity markets, dropped 6.15% in July 2015, offering clues to increased volatility and signs of an equity market pull back.1
August 2015 would prove to be a very challenging month for equity markets around the world. The S&P 500 pulled back 12% and bottomed on August 25th before rebounding some.2 Fears of a China slowdown and decelerating global growth spooked investors as shares in metals, mining, and commodities were the hardest hit. China’s shift from an industrial based manufacturer to a consumption based middle class economy caught many investors by surprise and creating a buildup of inventories.
September took the markets down once again as the end of August rally failed to materialize into a longer term trend. The S&P 500 finished the month down 2.8% while international markets as indicated by the MSCI EAFE finished down over 5%.3 Overseas, Europe was at the center of the refugee crisis as thousands have attempted to cross the Mediterranean Sea to escape war torn areas such as Syria. Many questions remained unanswered as countries grapple with the emergency need of thousands of fleeing people.
The S&P 500 posted its largest monthly gain since October 2011 during the month. The S&P 500 rallied 8.3% after two months of negative returns in August and September.4 Renewed investor optimism was found as China’s economic uncertainty began to stabilize and the country enacted more measures to boost their growth.
Equity markets across the globe rallied but all eyes remained on Janet Yellen and the Federal Reserve. Ever increasing hints of a December interest rate increase created a much anticipated meeting for December. In the meantime, the markets felt comfortable that the pace of future increases may be measured and reassured the bond markets that there was a clear vision and plan of action by the Federal Reserve.
November produced a relatively flat month of returns in the domestic equity markets. Overseas suffered a bit more as international markets pulled back and emerging markets were kicked around a bit more. Price drops were not reserved to the equity markets as West Texas Crude (WTI) tested the new lows of $40 a barrel as Saudi Arabia continue to keep production high and thus market prices low.5 The U.S. shale industry continues to face a profit strain with the ripple effects felt everywhere from energy stocks to the high yield bond market.
December came and brought another pullback in the equity markets. Most major indices were down for the month and offered little relief from a challenging 2015 market. There was little to cheer from the bond market either as Janet Yellen finally raised overnight lending rates from the extreme lows ever- present since the 2008 crisis. (For context, the last rate hike was in June of 2006.)
In another challenging time, global galactic wars raged across movie screens as the anticipated launch of Star Wars: The Force Awakens hit movie theaters to a rousing success. All indications point to a huge success for the movie franchise and its parent firm Walt Disney as movie watchers cheer the fight between good and evil in a far-away galaxy.
As 2015 comes to a close we are reminded that in certain year’s asset allocation and diversification can be challenged. Of the major equity indices, only the S&P 500 performed in positive territory with a return of a meager 1.4%. As the graph below indicates, other major equity indices were negative as indicated by the chart below and bonds were less than 1%.
Source: Morningstar Direct 6
As 2016 begins we need to recognize that patient and disciplined investors are rewarded when a proper plan is in place. Growth continues across the globe albeit at a slower pace than many would hope for. Stock market valuations remain reasonable and governments across the pond are committed to meaningful economic stimulus. Taking in these many economic positives it is reasonable to expect 2016 to be a prosperous year for market returns. We can never let emotional decisions from short term volatility interfere with sound rational thinking when investing for the long term.
Or to quote another sage, “Fear is the path to the dark side”. Yoda