2015 In Review: Collapsing Oil, Weakening Housing, Flat Equities

As 2015 winds to a close, economists examine the major trends in the American economy, noting a combination of deflationary effects that point to weak demand and possible volatility in the New Year.

The biggest story of 2015 was a continuation of the prior year’s biggest story: the falling price of oil. WTI futures fell to $35 at the end of December, recovering slightly but failing to breach $37 by the end of the year. Meanwhile, natural gas futures also fell to $2.22, reflecting a similar decline of over half its value from normal ranges seen in 2013 and 2014.

As 2015 winds to a close, economists examine the major trends in the American economy, noting a combination of deflationary effects that point to weak demand and possible volatility in the New Year.

The biggest story of 2015 was a continuation of the prior year’s biggest story: the falling price of oil. WTI futures fell to $35 at the end of December, recovering slightly but failing to breach $37 by the end of the year. Meanwhile, natural gas futures also fell to $2.22, reflecting a similar decline of over half its value from normal ranges seen in 2013 and 2014.

Oil’s Negative Impacts

The fall in oil prices had several effects, most of them negative. In late 2014, economists confidently called the fall in oil prices a net plus to the American economy, believing it would bring more economic activity and more spending. Retail and consumer discretionary stocks rallied. However, these equities suffered a sharp correction as consumer spending data flat-lined amidst weak or non-existent wage growth, which remained low until the very end of the year.

Additionally, the fall in oil prices also caused fears of growing defaults on debts. Credit markets saw high yield bonds suffer steep declines, with some junk-bond funds closing entirely amidst demands from investors to pull their money.

Housing Weakens

Experts expected a robust economy in an improved housing market, which was a key issue in Janet Yellen’s December speech in which she asserted that the Federal Reserve’s interest rate increase hinged on improvements in the housing market.

After that rate hike, however, data indicated a sharp decline in housing performance. November pending home sales fell by 0.9 percent, far below expectations of a 0.5 percent increase. The study, conducted by the National Association of Realtors, also showed that affordability became a serious issue throughout the country as home prices rose but wages did not. “Home prices rising too sharply in several markets, mixed signs of an economy losing momentum and waning supply levels have acted as headwinds in recent months despite low mortgage rates and solid job gains,” said Lawrence Yun, Chief Economist for the NAR.

Equities End with a Whimper

A tumultuous year of weak increases and sharp declines resulted in flat performance by the end of the year.

The S&P 500 index of U.S. stocks ended the year up less than 1 percent, excluding dividends, with a 14.3 percent decline from the highest to lowest point for the year. While the index has appreciated by 10.9 percent from its lowest point, investors have seen high volatility and little return throughout the year while price-to-earnings multiples rose as corporate profits fell throughout 2015.

Looking Ahead

Economists believe the appreciating dollar, fears of defaults, weak housing, and commodity volatility will remain high focuses in 2016, but a reversal of any of these worrying trends may be in the cards as early as the first quarter.

The largest wild card in the U.S. economy is how interest rate hikes, which began in December and predictions are for it to continue throughout 2016, will cause the economy to see slower growth. At the same time, economists hope that an improvement in the labor market, particularly wage growth, will be a major theme of 2016 that will solve several current risks in the American economy, such as the weakening housing market and low demand despite falling energy costs.