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Summary 2015 will be remembered for weakness in commodity markets, which bled over into global equities and U.S. high yield debt. In 2016, the divergence between monetary policy in the United States and the rest of the developed world could shape global financial markets. Underpinning all global markets is the ongoing transition of the Chinese economy from one driven by fixed investment to one led by domestic consumption, an unrivaled economic experiment. Below are what I believe are ten of the most interesting charts of 2015. The topics depicted had outsized impacts on financial markets in 2015, and will continue to be important considerations as the calendar turns to the New Year. While oil stole many of the headlines in 2015, falling by nearly two-thirds over the past eighteen months, a broad commodity index moved to its lowest level since 1999. Industrial metals, precious metals, and agricultural commodities were all pressured by a slowdown in global growth. Global Commodities Trade at 16-Year Low (click to enlarge) Source: Bloomberg, (Data through mid-day 12/24/15) Stress in commodity markets was primarily blamed on moderating Chinese growth. While the Chinese growth rate has receded, the absolute change in the size of the Chinese economy was still roughly equivalent to its absolute growth in 2006 and 2007 when the economy was growing at double digit growth rates. In 2015, the Chinese economy grew in absolute terms by the size of the entire Swiss or Saudi Arabian economies. Said differently, the Chinese economy still grew in nominal terms by the size of all the goods and services produced in Switzerland in a year. The China effect on commodity prices has been less of a function of flagging growth rates, and more of a function of the party’s efforts at transitioning the economy from an investment-led to a more domestic consumption-driven economy. Chinese Economic Growth in Absolute Terms is Still Tremendous Source: Bloomberg, World Bank While China had an impact on commodity prices, the strengthening dollar also was a big story. When the value of a dollar rises, it takes fewer dollars to buy a given commodity. These global commodities traded in dollars also become more expensive in local terms, potentially reducing demand. As the graph below shows, the dollar is at its strongest points versus a basket of global peers in the last decade-plus. As the Fed normalizes monetary policy further, higher interest rates on dollar investments could also spur a rally in the greenback, which could further pressure commodity prices and U.S. exporters and multinationals with large foreign businesses. The U.S. Dollar Index Strengthens Against Global Peers (click to enlarge) Source: Bloomberg, (Data through mid-day 12/24/15) A key theme in 2016 could be the divergence of U.S. and European monetary policy. Lend money to the German government today for ten years, and they will pay you 0.64% per year. In April, that figure was an astonishing 0.075%. That figure is still negative for 10-yr Swiss government bonds at -0.09%, meaning investors pay for the privilege of the Swiss government to hold their money in Swiss francs. Higher interest rates in the United States could continue to rotate money from the low rates in the developed world (Europe and Japan) and more stressed emerging economies. Shifting capital flows will create volatility and opportunity. German 10-yr Highlights Ongoing European Economic Weakness Source: Bloomberg Speaking of volatility, U.S. investors may have been unnerved by an uptick in market volatility in 2015, but that volatility paled in comparison to the volatility on the shallower Shanghai exchange. Chinese Volatility Could be Part of New Normal (click to enlarge) Source: Bloomberg, Standard and Poor’s One of my key themes has been the long run risk-adjusted outperformance of lower volatility assets relative to their higher beta cohorts. I wrote an expansive series this summer on the L ow Volatility Anomaly , or why lower risk stocks have outperformed their higher risk brethren over time. That theme continued in 2015 as a low volatility component of the S&P 500 outperformed high beta stocks and the broader market gauge on an absolute basis. Low Volatility Outperforms (Again) (click to enlarge) Source: Bloomberg, Standard and Poor’s; (Data through 12/23/15) This preference for lower volatility assets also extended to the topical high yield bond market ( as described in this piece ). Driven by the underperformance of commodity-sensitive speculative grade bonds, the High Yield Index is under the most stress since early in the economic recovery in 2009. This stress can be seen by the sharp underperformance of lower rated riskier ratings cohorts versus the performance of the higher rated BB junk bonds. Chasing Yields Led to Bad Outcomes in High Yield Source: Barclays; Bloomberg While the last two graphs compared different quality classes within an asset class, the next graph depicts the volatility of the 30-yr Treasury versus the S&P 500. As one would expect upon the unwind of vol-suppressing extraordinary monetary accommodation, interest rate volatility increased in 2015 as shown by the variability of the performance of long duration Treasuries. For investors seeking shelter from equity volatility in fixed income, long duration securities with higher interest rate sensitivity may not be the haven for you. (This is a topic I have also covered in the past through an examination of the volatility of the bonds and equity of Apple (NASDAQ: AAPL )). Equity vs. Rate Volatility (click to enlarge) Source: Bloomberg; Standard and Poor’s; U.S. Treasury The Fed rate increase was in large part driven by a firming in the labor market that pushed the unemployment rate down towards its estimated natural rate of unemployment. A different perspective of the labor market shows that labor force participation is at its lowest level in nearly forty years. While we have seen a cyclical recovery in employment figures, the economy still faces secular headwinds from an aging population. Perhaps, there is more slack in the labor market than suggested by official employment statistics. If so, the failure of wage inflation to materialize could increase the risk of policy error by the Fed. How Healthy is the Labor Market? Labor Force Participation at Multi-Generational Lows (click to enlarge) Source: Bloomberg, Bureau of Labor & Statistics; (Data through 11/30/15) The weak economic recovery post-crisis has kept the U.S. economy from operating at its full potential. Limited investment by a necessarily more austere government after record cyclical deficits has pushed the average age of government fixed assets to its oldest age on record. Similarly, corporations have been more apt to invest in their own securities through record share buybacks than undertake capital investment in the real economy, extending the age of the private capital stock. Older fixed assets and infrastructure could be another structural headwind that pressures domestic economic growth. A Growth Drag from Aging Infrastructure? Source: Bureau of Economic Analysis 2015 was a fascinating year in financial markets. Plunging commodities, flagging Chinese growth, ultra-low rates in Europe, and the underperformance of higher risk investments in the United States all were symptomatic of tumultuous global markets. Domestically with equity multiples still above historical averages and yields on investment grade assets still historically low, forward returns are likely to fail to compensate investors for a continued heightened volatility. Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.