February 2016 Market Commentary

There is a saying that as January goes, so go the markets. While true 72% of the time from 1966 to 2015 it is important to understand this did not hold true in 2009, 2010, 2014 and 2015. We are in different times. Anyone trying to predict the market beyond tomorrow is speculating. 

While we have been clear in stating we do not feel we are in for a repeat of a 2008 type scenario, there are several issues the market must work through before it can regain healthy footing. The equity markets have experienced one of the best bull markets from March '09 to May '15 with only a few blips along the way (i.e. The European Crisis in 2011 and Ebola Scare in 2014). Since May 2015 we have seen plenty of volatility and while the broad markets are off roughly 12% from their highs, this does not mean the coast is clear.

To get a clear idea of some of the worries, one has to look no further than the High Yield bond market (Junk Bonds). As a refresher, a high yield bond is a loan to a corporation whose credit rating is below "investment grade". It carries a higher risk of default. Most do not default, of course but the risk is higher. With interest rates at record lows for 7 years, many companies have overextended themselves and borrowed too much. Banks and institutions were willing to finance loans of lower quality because income was at such a premium for so long. Cash, CD's and conservative bonds were yielding next to zero. Investors and banks were reaching for yield. While we are not blaming the Fed we are blaming a lack of options for income.

Having some defaults in the high yield bond market may actually be what is "needed". Once the toxic debt is wiped out, investors may have more confidence to re-enter. This, of course, assumes the remaining corporations are the healthier ones.