Remarkably, despite numerous periods of extreme volatility across financial markets during 2015, the S&P 500 and 10-year Treasury yields will end the year almost exactly where they started. I expect heightened market volatility to continue into 2016 as investors question the sustainability of the U.S. economic expansion in the midst of global economic weakness, deflationary pressures and tighter domestic monetary policy.
However, before looking too far ahead into 2016, it is useful for all investors to look back and discover what lessons can be learned from the previous year. Investors should always pay close attention to Mark Twain's quote "History doesn't repeat itself, but it does rhyme" when making decisions. Here are a few key lessons investors learned (again) during 2015:
1) The laws of supply and demand still matter. The releveraging of corporate balance sheets during 2015 helped drive valuations for both the equity and credit markets. Debt-financed, shareholder-friendly activity (i.e. increased demand) in the form of share buybacks, higher dividends and M&A activity helped to support equity prices. Conversely, corporate bond spreads finished the year wider in response to record supply of new debt issuance. Equity markets will likely require more than just "financially engineered" earnings for growth during 2016.
2) Don't try to catch a falling knife. The energy and metals & mining sectors struggled from the very beginning of 2015 and finished the year even weaker. What appeared to be attractive entry points for stocks and bonds tied to the commodity markets were always followed by even better entry points later. Look for signs of sustained strength in a struggling sector before "jumping in with both feet."
3) The world is flat (and getting flatter). Global markets are playing an increasingly important role driving valuations of U.S. financial assets. January's historic rally in long-term Treasury bonds was led by a sharp decline in European bond yields. With negative interest rates now commonplace across the Eurozone, U.S. bond investors need to maintain a close eye on global interest rates for clues about where U.S. rates are headed.
One year wiser, I am looking forward to another successful year for Penn Mutual Asset Management in 2016!
This blog post is for informational use only. The views expressed are those of the author, Dave O’Malley, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Any statements about financial and company performance of The Penn Mutual Life Insurance Company or its insurance subsidiaries (each, “Client”) made by the author is provided with a written consent from the Client. Penn Mutual Asset Management is a wholly owned subsidiary of The Penn Mutual Life Insurance Company.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.