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!
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