Global equity markets recovered during the fourth quarter of 2015 as perceived risks from China temporarily abated. As has been the case throughout the year, the U.S. stock market outperformed other developed and emerging markets, likely reflecting a more favorable economic outlook for the U.S. economy. The implementation of an interest rate rise by the Federal Reserve in December did not prove disruptive to equity prices, at least in the immediate period. However, much of the stock market gains were reversed in early 2016, reflecting renewed concerns over the Chinese economy and its impact on global economic growth.
The fourth quarter recovery in global markets reduced the 2015 decline in the MSCI All Country Index to 2.4% on a total return basis. The 2015 return on the U.S. equity market as measured by the Standard and Poor’s 500 Index was a positive 1.4%. International developed Markets as measured by the MSCI EAFE Index declined by 0.8% for the year. Emerging markets were the worst performer by far, exhibiting a decline of 14.9% for the year. The fourth quarter total return on the S&P 500 Index was 7.0%, while the respective returns on the MSCI EAFE and Emerging Market Indices were 3.3% and 0.7%. For the fourth quarter of 2015, The All Country World Index returned 4.8%.
The U.S. economy is likely to remain in a pattern of steady growth at an inflation adjusted rate of 2% over the next several years. Growth in employment will provide a favorable backdrop for the U.S, extending the 200,000 average gain in monthly payrolls which has prevailed over the past six years. Average hourly earnings growth averaged 2.5% in 2015, and the rate of gain seems likely to gradually accelerate. The U.S. consumer should be favorably impacted by the decline in the price of oil and a stronger U.S. dollar, which reduces the price of imports. While further interest rate increases will be implemented by the Federal Reserve, the pace of gains is unlikely to have a negative impact on economic growth. For the first time since 2011, the U.S. budget will actually provide a modest tailwind for the U.S. economy.
Outside of the U.S., the Chinese economy has returned to the forefront of investor concern in early 2016. Notwithstanding increased volatility in the Chinese stock market and currency, we do not expect a slowdown in economic growth to evolve into a hard landing. As we have discussed previously, China is attempting to shift economic growth away from investment, capital spending, and infrastructure in favor of services and consumption. The transition will continue to encounter bumps in the road. However, ample tools exist in China in terms of monetary and fiscal policy to prevent an outright economic decline, which the Communist Party has a vested interest in trying to prevent.
Prospects for the rest of Asia and emerging markets as a whole will greatly depend on the Chinese economy. Investor concerns should gradually abate during the year assuming that the transition in China is not overly disruptive. Assuming that this trend materializes, prices for commodities, including oil, should gradually stabilize if not begin to recover. The outlook for Europe is favorable, reflecting an aggressively expansionary monetary policy by the European Central Bank and a slow but unmistakable move away for austere fiscal policy. A British referendum on whether to remain in the European Union is expected this summer, but we expect the majority to favor remaining in the EU.
Our equity strategy reflects our positive overall view of global common stocks. Having raised cash through the sale of equities in recent months, we are looking for opportunities to commit the cash to new common stock commitments. The energy sector is of particular focus following significant corrections in share prices. Overall values in Europe and Japan seem more compelling than those in the U.S. stock market, which has substantially outperformed over the past several years. We are also looking to emerging markets for an opportunity to increase representation on a selective basis.
As of December 31, 2015, our equity asset allocation is as follows:
North America (Including U.S.) 61%
Developed Markets (Including Europe and Japan) 31%
Emerging Markets 6%
In fixed income markets, the December implementation of a 25 basis point increase in short term rates by the Federal Reserve resulted in a fourth quarter interest rate rise across the yield curve with shorter term rates rising at a faster pace than those in the longer end of the market. As of December 31, 2015, yields on two year Treasuries were 1.05% as compared with 0.63% as of September 30. Yields on five year Treasuries increased from 1.36% to 1.76% over the same time period. In ten year Treasuries, yields during the fourth quarter of 2015 increased from 2.04% to 2.29%. German rates increased slightly during the fourth quarter, from 0.59% to 0.63%.
We now expect the Federal Reserve to follow the December rate rise with additional increases during 2016. As reflected in the FOMC December statement, the pace will be gradual and data dependent. The stated goal of the Federal Reserve is to normalize rates while still encouraging employment and wage gains, and an increase in the U.S. inflation rate toward the 2% target. Our expectation is that the increase in rates will not jeopardize U.S. economic growth during 2016 and beyond. In view of this outlook, we expect to continue to maintain a shorter than average market duration in our taxable and tax exempt fixed income portfolios. In undertaking new purchases we continue to focus on obligations which offer good value relative to those of comparable credit quality and maturity.
This report is for informational purposes only, and contains data based on information derived from sources Princeton Global Asset Management (PGAM) believed to be accurate. However, PGAM cannot assure the accuracy of the data. Past performance is not a guarantee of future results. Portfolio holdings and characteristics are subject to change. The information in this report should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the securities transactions or holdings that may be cited were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities cited.