The market's 2015 performance is unusual, since practically every year since 1995 has seen some asset deliver returns above 10%. Returns in hedge funds are expected to be the worst since 2011, and 2015 is looking to be the worst year for asset allocation funds since 1937.
A last-minute rally might push the S&P 500 into barely-even territory for the year, but the Russell 2000 SmallCap Index is down more than 5% year-to-date. The Morgan Stanley EAFE international index, representing large-caps in the developed countries of the world, is also down more than 3%.
Though it doesn’t feel like it, we are in the second longest bull market of history. As the bull market reaches its natural conclusion, worries over the direction of the economy and the strength (or rather weakness) of corporate earnings, together with the Fed finally moving interest rates higher, are having the expected effect. While it’s far from a foregone conclusion that the bear will soon stumble from his hibernation den, it should still come as no surprise when he eventually awakes as he always does.
In fact, Neil Hennessy, President, Chairman and CEO of Hennessy Advisors, Inc. (whose company’s stock is covered by the SmallCap Informer), opined in a recent quarterly report that “I believe we’ve been in a correction for over a year, but it’s been a sideways correction, as the market has exhibited some fatigue after a long bull run. Currently we are experiencing slow but steady economic growth, and stocks are generally trading right in line with their long-term historical averages.”
But far from being morose about the market’s future, Hennessy continued: “I believe corporate balance sheets are in excellent shape, oil prices are down, and inflation is low. In my view, taken together, these fundamentals signal a continuation of the bull market that began six years ago. And with investor worries over volatility and higher interest rates keeping sentiment subdued, I firmly believe there is room for this market to move higher in the coming years.”
One Bright Spot: The SmallCap Informer's Picks
Our view of the market remains the same as always: bear and bull markets are impossible to predict, and our approach to stock selection—finding quality small companies, buying them at the right price, and holding them with a perspective for the long-term—remains an investor’s best strategy for market success. And in looking for success in 2015, our picks might be one bright spot in the market.
Our track record in 2015 to date bears the first fruits of our small-cap stock selection strategy. The compound annual return of our SmallCap Informer selection year-to-date through December 30, 2015, with dividends, is 6.2%. Investing instead in an S&P 500 index fund would have returned 1.0%, while a comparable investment in a Russell 2000 index fund would have generated an annualized loss of 3.6%. These results are calculated using the closing price of each new recommendation on the next business day following the publication date of an issue, and assume an equal amount invested in each selection. To be sure, these calculations do not replicate any “real world” investing strategy for most investors, but they do give a sense of the performance of our picks on the whole, especially in the sideways market of 2015.
- DOUGLAS GERLACH