By: Steve Smith
There have been a number of commentators noting the similarity between what is happening in the market now to the late 2015 early 2016 period. If the analogous action holds true to form that doesn’t bode well heading into 2019.
During January 2016, the S&P 500 Index fell some 15%, the worst January of the past 10 years.
One of the key similarities is the steep decline in oil prices. If you recall starting September 2015 the price of oil took a precipitous fall eventually declining by over 50% to a low below $30 per barrel.
The recent decline hasn’t been as deep, currently, it stands at $50 per barrel, but it’s been equally steep and there is no sign the selling is over.
In addition to the ramifications that the decline in oil might be indicative of a slowdown in global growth, it also might have a ripple effect through the financial system.
As I discussed here previously, nearly 20% of the high yield bond market is tied to the capital-intensive energy sector. If some of those borrowers begin to default it will weigh on the banks which in turn could tighten up overall lending.
This comes just as interest rates are rising and Fed Chairman Jerome Powell recently raised red flags of concern over the level and leverage of corporate bond market. Worries of a domino effect of defaults are growing.
Turning to the charts, we can see the current decline is the equivalent to not only the late September 2015/early 2016 but rather, it began a year prior when the market rolled over in the summer of 2014 and gave us a panic low in October 2014.
What followed was…
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