Market Update - December 2015

Weak manufacturing data from China kept global markets from ending the year on a positive note. Global stocks (MSCI All Country World Stock Index) ended the year down 2.2%, but intermediate bonds were positive and ended the year up 1.1%. U.S. small stocks were hit hardest in December, sliding 5.0%, while the S&P 500 fared better with a 1.6% decline. International small stocks were positive with a 0.6% gain and so were REITs, up 1.0%. Oil continued to slide and dragged commodities down 3.1%.


  • The final estimate of third‐quarter real GDP growth came
    in at 2.0%, up from the initial estimate of 1.5%. The upward revision is a result of an increase to the estimate of private investment spending.
  • Inflation (CPI) was flat in the most recent month. The year-over‐year inflation rate now stands at 0.4%, still well below the Fed’s target.
  • Job gains for the month came in strong at 292,000 and beat analyst expectations. The unemployment rate remained at 5.0%.


  • U.S. small stocks were thrashed with a 5.0% decline for the month. U.S. large cap (S&P 500) returned ‐1.6%.
  • International stocks fared better than their U.S. counterparts with international large cap falling 1.3% and international small cap gaining 0.6%. International small cap finished out the year +9.0%.
  • Emerging markets tacked on another 2.2% decline this month to close out their return for the year at ‐14.9%.


  • The 10‐year U.S. Treasury yield increased slightly to 2.27%.
  • U.S. bond returns were slightly negative as rates moved higher. Intermediate‐term bonds fell 0.3% and international bonds fell 0.2%. TIPS fell 0.8%.


  • REITs returned 1.0% but commodities fell 3.1%, led by a continued slide in oil prices.
  • After a strong month in November, managed futures returned ‐0.7% this month as market shifts hurt trend following.

Is the Chinese Yuan the New Heavyweight?
The announcement that the International Monetary Fund (IMF) will be adding the Chinese yuan to its basket of reserve currencies has left some investors concerned. Many in the media have pushed the notion that the U.S. dollar is losing its reserve status and that this will damage the economy. But is there any truth to this?

There is no doubt that the dollar’s reserve status has played an important role in our economy. For one, it has allowed us to run a current account deficit over the past 40 years (import more than we export) which has improved our standard of living. To put it simply, the way we have been able to cover more goods coming into our country than leaving is by “exporting” the dollar, which would be interrupted by losing reserve status. But to be clear, the IMF reserve fund is already a basket of various currencies. The yuan will only be added as a small percentage. The current split is between the U.S. dollar, euro, British pound, and Japanese yen, with the U.S. dollar occupying the largest slice at 43%.

So to assume that this change means the yuan will overtake the dollar is a stretch. By definition, the reserve currency must be from a country that is comfortable running current account deficits and China has been very protective of its export economy. In addition, the lack of transparency and the tight control China has on the yuan make it less suitable to be the primary reserve currency.

Thus it is very unlikely that the yuan will challenge the dollar’s prominence in the global economy. Central banks and investors around the world still have much more confidence in the dollar as the most secure currency, and this announcement has not changed that.

Sources: Bureau of Economic Analysis (BEA), Federal Reserve, Institute for Supply Management, JP Morgan, Morningstar Direct, Standard and Poor's, Wells Fargo, Yahoo! Finance, BofA Merrill Lynch,

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