5 Big Takeaways From 2015

Jason Stipp: I'm Jason Stipp for Morningstar and welcome to The Friday Five. This week we'll look at five of the biggest stories from 2015. Joining me is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: Thanks, Jason.

Stipp: First big story of 2015 is the Fed finally taking steps to normalize policy, but just first steps.

Glaser: This is a baby step toward a normal monetary policy. You look at the size of the balance sheet; it's still enormous, and there are no signs to wind it down anytime soon. You look at the expected pace of increases; those are going to be relatively slow--at least that's the current plan. And rates remain very, very low. But the Fed did that important first step, something that they had been preparing the markets for for a long time, and I think the fact that there wasn't a major market reaction when they did it is a sign that the preparation paid off.

Looking into 2016, I think the question will be, can the Fed's communication plan continue to be successful? Will we be caught off guard by increases that are faster than expected? That will be one of the big question marks.

Another one will be how do the global central banks impact the U.S.? The European Central Bank is still very much in easing mode, as is the Bank of Japan. What will that do to the dollar and what impact does it have on corporations and among exporters? It should be another interesting year from a central bank standpoint.

Stipp: Another big story from 2015 was continued pain in oil and energy. What should investors think about as we move into the next year?

Glaser: Energy prices continued to fall, and the basic outlines remain the same and are well-known. It's a supply/demand imbalance, where global growth is relatively slow in a lot of emerging markets like China and developed markets as well. You don't have a lot of demand for oil.

You have lots of new supply coming from the U.S. OPEC continues to produce at a very high rate. They don't see any need to cut. Potential new supply from places like Iran could be coming online as well. That creates some concern, and you see that in the oil prices.

This has had an impact on a lot of things. High yield has been under pressure. Part of that is due to the energy names in there. And also energy stocks. The sector is down over 20% for the year, by far the worst performer of any of the stock sectors. A lot of investors maybe are wondering if this has opened up a big pocket of opportunity. Should I take an outsized position in energy?

I think this is probably a time to remain pretty cautious. Overall, our take is that energy prices will rise again. The current level of prices just isn't enough to sustain the investment that will be needed to keep oil flowing at this level. It will eventually be self-correcting. But that's a long-term thing. In the near term, we could still see prices fall even more. We could still see them be under pressure for some time. If you were to take an outsized position in energy stocks, you're making a big bet on what's happening with oil, as that's going to be the big driver of all of those names.

This is a time to think about what your exposure is, maybe nibble around the edges if you find some good opportunities. You can maybe get into some higher-quality names than you had before in this space. But it still seems like a time to be somewhat cautious from a portfolio point of view.

Stipp: 2015 was a busy year for investment bankers. There was tons of M&A activity. What's the takeaway on that?

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Glaser: Dealogic, which is a research firm that tracks this, says this is a record year for M&A globally, with $5 trillion in volume. That surpasses the 2007 level, which was the previous record. Healthcare and tech were the biggest sectors that saw deals getting done, but it was pretty broad-based.

There were a couple of drivers here. First is that companies have access to capital. Rates remained pretty low, so it is easy for corporations to go out there and raise debt or raise equity if they needed to in order to fund these transactions. That obviously helps things get done.

Some of it was just a desire to gain scale, to try to gain cost advantage. Given that growth is pretty slow, it's difficult to grow the top line, to grow revenue, but many firms thought that maybe if they got bigger, they'd be able to wring out some cost synergies there that could help them boost profitability. That drove some deals.

Also we saw the impact of activist investors pushing management to explore strategic alternatives, to explore other options for the businesses if they weren't operating at the top of their game. We saw some transactions like Heinz Kraft that really fit into that mold. That was a big trend particularly in the consumer packaged-goods space and the consumer-defensive space.

A lot of these factors are going to continue through 2016, so we'll probably see some more deals getting done. I think one of the key things to watch will be valuations. A lot of these deals got done in 2015. Valuations were full, they were high, but valuations for the whole market were high, so maybe that wasn't terribly surprising. But we haven't seen any totally off-the-wall crazy high valuations for a lot of deals--just a few cases here and there. Keeping a close eye on valuations when evaluating these deals might give a good idea of where we are in that M&A cycle.

Stipp: China upset the markets on several occasions in 2015. What's our outlook for the country?

Glaser: Global markets were roiled by China, and part of that was that growth was much slower than many people had expected across a number of different metrics. Also some policy missteps made people a little bit cautious--maybe the Chinese government doesn't have the toolkit in order to keep the economy from getting much worse. We saw a surprise devaluation to the currency. We saw some halting of trading of stocks for an extended period of time, something that made many market watchers worried.

I think some of the near-term concerns seem to have faded. People see that, yes, China is slowing but maybe not precipitously. But over the next couple of years, we think fixed asset investment is going to remain low, and that's been one of the big drivers. Dan Rohr, a Morningstar analyst who has covered this for us, thinks this could be the trend for quite some time. And although we do expect the Chinese consumer to be an important driver of the global economy over time, that transition from fixed investment to more of a consumer-led economy is not going to be particularly smooth, it's not going to happen overnight, and we could see some bumpiness along the way.

I think one of the stories that will continue in 2016 is tracking the progress of that, looking at some of the policy moves that are made, how China positions itself for this to happen. It will continue to be a fascinating story.

Stipp: Lastly, although investors may not think the U.S. economy was a big story in 2015, compared to the rest of the world, we turned in a pretty decent performance.

Glaser: It was a decent year. Bob Johnson, who is our director of economic analysis, thinks we'll be at around 2.5% growth for 2015. That was driven by a lot of things: We saw some continued performance of autos--strong auto sales was a highlight--continued job growth, the unemployment rate continued to come down.

But there were disappointments as well. Manufacturing remains under pressure with things like the strong dollar and with oil continuing to be weak. Housing too was surprisingly weak. Starts just weren't where many economists had hoped, and that is something that drives the economy because new homes obviously entail a lot of construction work and materials, and that just didn't materialize.

Looking into 2016, Bob thinks we're going to be in a very similar range--2% to 2.5%. It's not going to be a big takeoff. And some of these long-term trends are going to continue to hold back the U.S. Slow demographic growth, slow credit growth make it difficult to see the economy growing much faster.

But when you compare it to some of what's happening across the global economy, the slow-and-steady growth is certainly better than moving in the opposite direction, and there are no signs we're going to fall off that growth trend either.

Stipp: Jeremy, thanks for another great year of insights.

Glaser: You're welcome, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.