What Was the Biggest Surprise for Portfolios in 2015?
What I Got Right (and Wrong) in 2015
The Biggest Surprise
I should also note my biggest surprise. While I didn’t have an explicit forecast on European sovereign debt, I admit that I completely missed the possibility that by the end of 2015, 40 percent of the European sovereign debt market would be trading at a negative yield. I didn’t consider that investors would have to pay Germany for the privilege of loaning it money for five years.
In summary, my misses all had a common flavor: Returns were generally outside the range that seemed reasonable at the start of the year. Underestimating the range of potential outcomes is one of the most common of forecasting errors, and one that I was guilty of in 2015. This is something I’m taking to heart as the bull market ages another year.
Market Realist – 40% of the European sovereign debt market is trading at a negative yield.
The graph above shows the yield on five-year sovereign bonds issued by various European countries. Most five-year bonds in Europe are yielding negative, which is unprecedented. The Swiss five-year is trading at -0.6%! Even the Swiss ten-year has a negative yield. The ECB’s (European Central Bank) monetary easing program is one of the main factors behind negative yields on European bonds.
In fact, extremely low yields in Europe and Japan have led to the increased foreign demand in US Treasuries (TLH)(IEF), which we talked about earlier.
Looking forward, we can see that 2016 is likely to be a tough year for US equities (VOO)(IVV) and high yield bonds (HYG)(JNK). Consider dollar-hedged exposure to the international markets. Also consider certain emerging markets (EEM), like India (INDA), which benefit from lower commodity prices and depend less on exports.
Read What Slow Global Growth Means for Portfolios for more on how to position your portfolio in the new year.
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