Capital & Bond Market Outlook 2016

February 3, 2016

Capital & Bond Market Outlook 2016 Photo

Our outlook for stock and credit markets continues to be cautious as we continue through 2016. We began 2015 with the investment thesis that it would be the year that “Main Street outperforms Wall Street.” This theme seemed to play out, as financial assets experienced decreasing values and increasing volatility while the U.S. economy continues to be steady. As we look out into 2016, we are cognizant that global markets are playing an increasingly important role driving valuations of U.S. financial assets. Last January’s historic rally in long-term Treasury bonds was led by a sharp decline in European bond yields. With negative short-term 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. With that said, opportunities do exist to generate solid returns and pockets of long term value can still be found.

Wider spreads for corporate and structured securities during 2015 improved valuations and turned our outlook more positive for credit risk despite global economic headwinds. Credit markets have clearly shown cracks in 2015 but we expect growth in the domestic economy to remain strong enough to support current valuations and extend the credit cycle. Challenges will persist for energy and metals & mining names as commodity prices may rebound modestly but not enough to avoid defaults among highly levered borrowers.

2015 Actuals and 2016 and 2017 Forecasts 2016 Market Outlook table

We expect Treasury rates to move modestly higher in 2016 in response to Federal Reserve tightening and additional global central bank selling. Interest rate increases at both ends of the yield curve will be limited by ultra-low sovereign bond rates in Europe and Japan. We expect higher inflation readings in 2016 as the benefits of falling commodity prices begin to fade and the housing price component of CPI (owners’ equivalent rent) to maintain its upward trajectory. Wage increases should also be supported by declining availability of workers.

Performance for U.S. equities is expected to be more challenging as the stronger dollar, wage pressures and higher borrowing weigh on corporate earnings. Moderate interest rate increases will limit the size of the equity sell off but higher volatility will persist as transitions between investor fear and greed are happening more rapidly.

Continue to follow The Long View Blog as we share our perspectives and insight on the financial markets and global economies as we continue through 2016.


Tags: Viewpoints | Bonds | Inflation | Market performance | 2016 Outlook

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The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.

This material is for informational use only. The views expressed are those of the author, 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.

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.

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