Short-Term Optimism, Longer-Term Caution

Global CIO Commentary by Scott Minerd

Last week’s investment roller coaster was something we had been expecting—U.S. stocks delivered their usual bout of seasonal volatility right on cue. For now, recent spread widening in high-yield bonds and leveraged bank loans seems to be over, and it also appears that equities have regained their footing after a turbulent week.

With the anticipated seasonal pattern of higher volatility in September and October now largely fulfilled, we anticipate more positive seasonal factors over the next two months. Over the last 68 years, the S&P 500 has averaged monthly gains of 0.9 percent in October, followed by even stronger increases of 1.2 percent in November and 1.8 percent in December.

The current dark cloud that hangs over Europe is a serious threat and something that investors should closely monitor. If the anticipated seasonal strength—which is typically driven by an influx of cash into pension funds that their managers are keen to put to work—is not forthcoming, investors should seriously question how much further the current bull market can run. As of now, we remain cautiously optimistic as we await some crucial economic data.

High-Yield Poised for Rebound?

The high-yield sell-off during the third quarter follows the pattern seen in 2004. After the Federal Reserve first signaled a withdrawal of accommodation in 2004, the Credit Suisse High-Yield Index fell in the 20 weeks leading up to the June hike before resuming its bull run through the end of the year. This year, prices fell in the months leading up to the October end of quantitative easing, which marks the start of less accommodative monetary policy. If history repeats itself, high-yield bond prices should rebound in the fourth quarter.

U.S. High-Yield Bond Prices Today Versus 2004 Pre-Fed Tightening Period

Source: Credit Suisse. Data as of 10/22/2014. Average price for Credit Suisse High-Yield Index excludes defaults.

• Existing home sales rose 2.4 percent in September to an annualized rate of 5.17 million homes, the highest in one year.
• Housing starts rose 6.3 percent in September to an annualized pace of 1.02 million. Most of the gains were driven by a 16.7 percent jump in multi-family starts.
• Building permits increased by a modest 1.5 percent to 1.02 million in September.
• The FHFA house price index rose a better-than-expected 0.5 percent in August, a five-month high.
• University of Michigan Consumer Confidence rose to 86.4 from 84.6 in the initial October reading. The reading was the highest in seven years and was driven by better consumer expectations.

• Initial jobless claims rose off a multi-year low for the week ending Oct. 18, increasing to 283,000, the fourth lowest reading this year.
• The Leading Economic Index expanded by 0.8 percent in September. Nine of 10 indicators were positive.
• The Consumer Price Index was unchanged on a year-over-year basis at 1.7 percent in September. The core CPI also remained at 1.7 percent. Falling energy prices were offset by higher food and shelter costs.

China Slows Less than Expected in Third Quarter

• Euro zone consumer confidence showed a small improvement in October, ticking up to -11.1 from -11.4.
• Germany’s manufacturing PMI rose back into expansion in October, to 51.8.
• The manufacturing PMI in France disappointed in October, dropping to 47.3 from 48.8. The services PMI also missed expectations.
• China third-quarter GDP slowed less than expected, growing at 7.3 percent year over year after 7.5 percent growth the previous quarter.

• Industrial production in China beat expectations in September, accelerating to 8 percent year over year after a sharp slowdown in August.
• China’s HSBC manufacturing PMI ticked up in October to 50.4 from 50.2.
• Japanese exports rose 6.9 percent year over year in September, a seven-month high.

VIDEOS AND PODCASTS

 

2022’s Upside: The Fed Has Put the Income Back in Fixed Income

Anne Walsh, Chief Investment Officer for Fixed Income at Guggenheim Investments, joined Asset TV to discuss macroeconomic conditions, risk, and relative value in the bond market.

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2022’s Upside: The Fed Has Put the Income Back in Fixed Income

 

Macro Markets Podcast Episode 26: Mortgage-Backed Securities, Structured Credit, Market Liquidity

Karthik Narayanan, Head of Securitized for Guggenheim Investments, discusses value in the residential mortgage-backed securities market and other ABS sectors. Anne Walsh, Chief Investment Officer for Fixed Income, answers a listener question on liquidity. Jerry Cai, an economist in our Macroeconomic and Investment Research Group, brings the latest on the labor picture and an update on China.

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Macro Markets Podcast: Episode #26