2015 In A Nutshell

2015 may have been a turning point for markets. In November 2008, the Federal Reserve started with the first Quantitative Easing (QE), a monetary policy used to stimulate the economy, which was in severe crisis. The Central Bank was increasing the money supply, buying financial assets from commercial banks and other financial institutions, thus raising the prices of those assets and lowering their yield.

There were three periods of QE. During the first QE, the Fed injected 600 billion dollars into the US economy, 35 billion per month for 17 months. Two years later, the Fed injected 600 billion dollars more in 7 months with the second QE, 85 billion per month. And finally, in September 2012 the FED started with the third QE, injecting around 85 billion dollars per month until October 2014, which marked the end of QE3. The total amount added by the Fed to its balance sheet was more than 3.5 trillion dollars in 7 years.

From the lowest level (666 points) in March 2009 to the highest level in May 2015 (2134 points), the S&P 500 index increased 220% offering a good deal for investors. Those were very quiet years for investors because they were supported by the Federal Reserve’s purchases, which kept the prices of most assets around the world to constantly go up during the 7 years.

Now, it´s over. In December 2015, the Fed raised the interest rate for the first time since 2008 to a range of 0.25%-0.50% and is expected to raise it again this year. Historically, an increase in interest rates is bad for stock markets, and 2015 was a year when investors bet that it could happen. As markets try to anticipate policies, some assets showed strong movements during 2015, primarily currencies and commodities.

Strong dollar and weak commodities, key to understand 2015

In early 2015 we saw the US dollar strongly strengthen against other currencies due to the desire of international investors to take advantage of the interest rate hike. During first 15 days of January, the US dollar increased about 15%. A strong dollar is painful for commodities, so the price of most commodities went down during last year, this was most heavily seen in the prices of Oil. Therefore, a lot of companies that deal with commodities are in big trouble which is affecting all of the world’s markets.

Another important explanation of the weakness of commodities is China. China, the second-largest economy, is still showing economic data that is cause for concern. Its economy is slowing down faster than market expectations. To counter this situation, the government depreciates their currency and decreases interest rates. It is important to mention this because China is the biggest importer of commodities.