With a celebratory bang and then a doleful whimper, financial markets greeted the Federal Reserve’s long-awaited and even-longer-predicted first increase in its key policy interest rates.
This was the signal event awaited throughout 2015 by markets in the U.S. and abroad, one that had dominated debates and discussions among investors and analysts almost since the central bank set its federal-funds target rate at a range of 0% to 25% in December 2008, at the height of the financial crisis.
On Wednesday, seven years later to the day, the Federal Open Market Committee, the Fed’s policy-setting panel, lifted that range by 25 basis points (one-quarter of a percentage point), to 0.25% to 0.5%, at last fulfilling those long-standing predictions. Almost continuously during that time, there had been complaints that the near-zero rates were robbing American savers, and that lifting them would restore the income that was rightly theirs.
So far, at least, that’s not happening. In a veritable New York minute, major banks hiked their prime lending rates (even though some of the biggest are based in North Carolina or San Francisco these days). A generation ago, that would have meant higher borrowing costs for big corporations, but now it mainly hits the little guy and gal, notably with higher charges on consumer loans and home-equity lines of credit.
As for the rates paid on deposits, they’re not getting off the floor, at least not yet. And don’t look for money-market fund yields to rise enough to be discernible without a magnifying glass. Fund companies have been absorbing expenses just to pay that single basis point on money funds, in order to keep the money in-house and available for purchase of more profitable products.
The ZIRP—zero-interest-rate policy—was designed to lure (or force, if you prefer) investors into riskier assets, such as stocks and bonds. And that’s what it did, based on the tripling of U.S. stock prices from their nadir in March 2009. But ZIRP has produced essentially zip for investors in 2015.
Through Thursday’s close, the SPDR S&P 500 exchange-traded fund (ticker: SPY), which tracks the U.S. large-stock benchmark, had returned 1.1% for 2015, according to Morningstar data, including its dividend yield of just over 2%. The SPDR Dow Jones Industrial Average ETF (DIA) had returned just 0.5% over that span.
Large-capitalization Nasdaq stocks tracked by the PowerShares ETF (QQQ) fared far better, with a 9.6% total return. But that’s mainly the force of FANG—the acronym for Facebook (FB), up 36.1%; Amazon.com (AMZN), up 116%; Netflix (NFLX), up 151%; and Alphabet (nee Google, GOOGL), up 42.8%. As the old lottery ads said, you had to be in it to win it. Without FANG, you didn’t.
That disparity between the elite and the rest is also evident in the broad market. The Guggenheim S&P 500 Equal Weight ETF (RSP), which tracks the average stock in the large-cap benchmark, was down 3.5% through Thursday, 460 basis points worse than SPY. All of which is testament to the outsize influence of a few big stocks in the capitalization-weighted indexes.
Venturing abroad didn’t help, either, mainly because of the ascent of the dollar, which crushed commodities and emerging markets. For developed non-U.S. markets, the iShares MSCI EAFE ETF (EFA) slipped 1.4%, while iShares MSCI Emerging Markets (EEM) was battered by 16%.
Commodities also clobbered the credit markets, especially the riskier high-yield sectors; the iShares iBoxx Dollar High Yield Corporate Bond ETF (HYG) showed a 6.4% negative return, while the SPDR Barclays High Yield Bond ETF (JNK) suffered a 7.8% negative return. (That has made for a buying opportunity in closed-end junk funds, as the reprise of my Barrons.com weekday column, on page 29, discusses.) Even the iShares iBoxx Investment Grade Bond ETF (LQD), which eschews junk, had a negative 1.1% return.
Sticking close to home and avoiding the risks that bedeviled global markets paid off best. While virtually every big-name Wall Street economist a year ago was predicting a significant rise in the 10-year U.S. Treasury note’s yield, it is virtually unchanged from last New Year’s Eve, at 2.19%. That has produced a modest but positive 1.8% total return on the iShares 7-10 Treasury Bond ETF (IEF).
Municipal bonds quietly have been the star of 2015, despite negative headlines about Puerto Rico, Chicago, and Illinois. The iShares National AMT-Free Muni Bond ETF (MUB) returned 2.4%. And folks clipping tax-free coupons upward of 5% on longer-term premium munis may figure that’s about as good as it gets in a world of rising risks and, at best, middling returns.
THE BIRD IN THE HAND from boring bonds didn’t look so bad after the stock market did a second take on the Fed’s rate hike. An initial 1.5% relief rally in the S&P 500 on Wednesday gave way to an equal drop on Thursday and then another 1.8% plunge on Friday.
Whether the slide at week’s end was exacerbated by the expiration of December index futures and options is immaterial in the grand scheme of things. Friday’s fall was a no-confidence vote in central bankers, not just in the U.S., but abroad. Japanese stocks plunged following the Bank of Japan’s announcement that it would step up purchases of ETFs there, not exactly the expected reaction.
China’s markets—ground zero for 2015’s volatility—also remain in thrall to the nation’s monetary authorities. The Shanghai Composite soared 87% in the first half of the year from its October 2014 low, as the People’s Bank of China encouraged equity investing, in part to support over-leveraged state-owned enterprises. Farmers wouldn’t tend to their fields during market hours, preferring to day trade on their smartphones. That was a sign of a bubble if ever there was one.
The Shanghai dropped about 40% in the subsequent three months, as the bubble burst. To counter the deflationary pressures exerted by the yuan’s rise (which came in tandem with the ascent of the dollar, to which it was linked), Chinese monetary authorities allowed their currency to decline, beginning in August.
That set off the market’s biggest spate of volatility this year, which spread around the world and sent U.S. markets reeling in late August. It also produced the most-copied headline of the year, “The Great Fall of China,” written first for this column by Barron’s former (but far from retiring) managing editor, Richard Rescigno, and ripped off by the Economist and on down.
The year 2015 will also be remembered for terrorist attacks on Charlie Hebdo, the French satirical publication, in January, then in Paris last month, then in San Bernardino, Calif. Meanwhile, Americans already are engaged in an internecine presidential campaign, even before the 2016 election year begins. The notion of the center coming together to get things done, when the extremes on the left and the right spouting simplistic solutions appear to attract so many followers, is depressingly unlikely.
For investors, the uncertain future makes the prospects for capital gains more elusive. Wall Street strategists have penciled in returns of about 10% for the coming year. Which they did last year, as well. Sorry to be cynical, but I can’t remember a year when they haven’t. Asking the sell side if stocks will produce a positive return in the coming year is almost like asking a barber if you need a haircut.
The take-away from 2015 is that markets remain dependent on central banks to generate returns. Since the Fed ended quantitative easing and the expansion of its balance sheet in late 2014, U.S. stocks essentially have gone nowhere. Other risk assets, notably high-yield bonds, have suffered as the stronger dollar has exerted downward, deflationary pressure on commodity prices.
Elsewhere, the European Central Bank’s aggressive QE is attempting to spur growth, but the impact of the refugee influx from the Middle East is imponderable. The Bank of Japan’s QE is showing signs of less effectiveness. With interest rates in Europe and Japan at or below zero, the main transmission of monetary stimulus seems to be through depreciating currencies. Competitive devaluation is a zero-sum proposition, as the 1930s depressingly demonstrated.
China and oil are the two biggest variables.
Lower energy costs ultimately should be a boon to most places, including many emerging economies.

But it hasn’t worked out that way, as cutbacks by producers have offset benefits to consumers. As for China, the de facto delinking of the yuan from the greenback and the pegging of it to a basket of currencies of its trading partners are eminently reasonable moves. This also means further declines in the exchange rate, which allows easing of domestic monetary conditions to counter slowing economic growth.
All of which suggests that investors will want income in an uncertain and yield-parched investment desert.
The conventional wisdom says the Fed will continue hiking its policy rates into 2016. The FOMC’s dot plot of its members’ guesses projects four quarter-point increases, to 1.375%, by this time next year.
The fed-funds futures market demurs, however, and is discounting a rise of only 0.825%, or somewhat more than half of what the Fed solons see.
The implication is that interest rates will remain even lower for longer, which is consistent with tepid returns from risk assets. In a world of modest growth, conflicts, and uncertainty, and with asset prices already elevated by central-bank exertions, it’s a lot to expect more.