Is Something Fundamentally Wrong Beneath the Surface of the Markets?

February 8, 2016

Is Something Fundamentally Wrong Beneath the Surface of the Markets? Photo

The tone of the market last week was very concerning to me. Not only did stocks suffer significant losses for the week, but some of the darlings of the market (Facebook, Netflix, Tesla, Amazon, Google) were under the most pressure. The momentum darlings of 2015 are now starting to lead the declines in 2016.

Even more concerning than the current equity volatility is what is happening in the fixed income credit markets. What started as significant underperformance of energy and metals/mining companies last year has now spread to other portions of the debt market. The most pain has been found in securities that have the least liquidity and has not been tied to a deterioration in underlying credit. To make matters worse, rumblings of significant problems at Deutsche Bank and Credit Suisse due to their exposure to emerging markets and Glencore (an Anglo–Swiss multinational commodity trading and mining company) have added to a feeling that more downside is to come.

I still feel the market has more downside, and I reiterate my opinion that the S&P 500 Index has the potential to drop another 10-15% in the next several months. This puts a strong bid for Treasury securities and Gold. I will be closely watching the upcoming Humphrey-Hawkins testimony from Janet Yellen, the direction of energy prices and the news out of China. I plan to stay defensive at this point and use any relief rallies to lighten positions. The S&P 500 Index did hold key resistance last week by closing above 1868. Remember that relief rallies are typically rapid and short lived.

Tags: Monday Morning O'Malley | Corporate bonds | Stocks | S&P 500 | Market correction | Deutsche Bank | Credit Suisse | Glencore

< Go to Monday Morning O'Malley

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.

Subscribe to Our Publications