Market Prices or Economic Fundamentals?

January 25, 2016

Market Prices or Economic Fundamentals? Photo

After another volatile week for the financial markets, equities and energy prices ended up after starting the week by marking new lows for the year. As I was listening to some of the key minds on markets and the economy comment on their views last week in Davos Switzerland, I got to thinking about the possibility that this market selloff could create a slowdown in economic activity. Or, in other words, does the wealth effect and market sentiment have a direct impact on economic activity, or does the normal gyration of market prices occur independently?

If we look on the surface, not much has changed from an economic perspective across the globe in the last few weeks, other than increasing concerns about China having a "hard landing." The data from various Purchasing Manager Indices show that the economic output has remained consistent during this period.

Market prices can move further than fundamentals warrant and set up good buying opportunities. I think a traceable bottom will be put in for stocks and energy in the next few months. Expect global central banks to be extremely accommodative with monetary policy in the next few months, as there are very few indications of inflationary pressures building.

I still like being short U.S. Treasury bonds with an entry yield below 2% on the 10 year bond.

Tags: Monday Morning O'Malley | Economic impact | 10-Year Treasury | Fundamentals | Davos | Market pricing

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