Within stock sectors, my expectations for a strong year for technology and a weak one for utilities were largely realized. Outside of stocks, I had expected a strong dollar, weak commodities and the relative outperformance of tax-exempt bonds. All played to script.
Market Realist – The winners and losers of 2015.
Utilities (IDU), among other sectors like staples (XLP), are usually dubbed “bond proxies.” This is because the utility sector is sensitive to interest rates. These companies usually have a large amount of debt in their books due to their high capital requirements. So higher interest rates squeeze utility companies’ bottom lines. Also, utility companies typically have a high dividend yield. As interest rates rise, the demand for dividend-paying companies falls. Utilities underperformed for most of 2015 as investors expected a rate hike. Utilities fell 5.3% in 2015, underperforming the S&P 500 index (IVV), which ended slightly negative for the year.
Meanwhile, while technology stocks (QQQ) didn’t have a groundbreaking year, they outperformed the broader markets, with returns of ~5% in 2015. Mature technology companies are amazingly rich, with Apple (AAPL) for example, holding close to $200 billion in cash and equivalents. These companies also hold a negligible amount of debt in their books. This allows them to navigate through the higher rates period with ease and relatively low valuations. So technology stocks were popular in 2015.
Meanwhile, as we mentioned in the previous part of this series, the US dollar (UUP) strengthened against almost every major currency in 2015. Investors expected a rate hike. A stronger dollar also led to lower commodity prices, though it wasn’t the biggest factor.