The S&P 500 Index returned +7.04% in the fourth quarter of 2015 compared to +4.88% in the same quarter last year.
The strong fourth quarter helped the index eke out a gain of 1.38% for the year compared to a 13.69% gain in 2014.
This marks the lowest annual percentage return since the -37.00% crash in 2008.
The last market low of 666.79 occurred in March 2009. Since then, the S&P 500 has climbed about three-fold!
That said, the bull appears to be on its last legs as the bear starts to show its ugly face in early 2016.
Headline risks in the oil patch, China, and high-yield junk market are spooking investors.
Without a catalyst in sight, investors are selling now and asking questions later.
Additionally, deflationary pressures (such as the strengthening of the US dollar) are wreaking havoc on commodities, emerging and international markets as well as U.S. multinationals.
In late January, the Bank of Japan (BOJ) shocked financial markets by adopting negative interest rates for the first time in a desperate attempt to kick start the world’s third largest economy.
A rate of -0.1% will now apply to excess reserves parked at the central bank, in which the BOJ plans on maintaining “as long as it is necessary.”
Global shares jumped on the news (albeit the rally was short-lived).
On the U.S. Federal Open Market Committee (FOMC) front, there was no change in policy.
Any future adjustments will be data-dependent, according to an excerpt from the January 27, 2016 release:
“In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”
During the strong fourth quarter, the largest purchase was American Express Company (AXP) in the credit services space.
American Express Company (Amex) is a global services company. Founded in 1850, the company is best known for its credit card, charge card, and traveller-related businesses.
Amex cards account for approximately 24% of the total dollar volume of credit card transactions in the US.
Card services make up about 51% of total revenue, with the remaining contribution from international card services (16%), global network & merchant services (17%), and global commercial services (15%).
As we enter 2016, I will remain steadfast in assessing opportunities across capital structures in this new normal environment of zero and negative interest rates.
We aim to deploy capital when we believe the odds are in our favor to produce adequate to superior returns.
On a positive note, Prudent Value’s cash and fixed-income holdings are benefiting us now as the nasty bear appears to be coming out of hibernation.
If the Wall Street Axiom, “so goes January, so goes the year” become reality, we should be in a good position to deploy our dry powder into wonderful businesses at fair to depressed prices.