A Tale of Two Markets

A solid run of domestic data has set the United States apart from a beleaguered world.

December 16, 2014    |    By Scott Minerd

If credit spreads widen due to falling oil, large investors will likely start to see value in high yield.


Global CIO Commentary by Scott Minerd

As seasoned investors are well aware, financial markets and economic trends seldom move in straight lines. Nowhere was this old adage more evident than in the discrepancy between last week’s domestic economic data releases and the performance of the stock market. Although U.S. equities suffered their biggest one-week drop since May 2012 on the back of declining oil prices, American consumer confidence reached new post-recession highs, with retail spending for the month of November comfortably beating expectations.

While the U.S. economic expansion continues to power forward, the international situation is becoming increasingly grim. The recent decline in the ruble, which Russia attempted to slow with a surprise rate hike of 6.5 percentage points to 17 percent, is reminiscent of the early stages of the 1998 Russian crisis. Elsewhere, the European Central Bank has fallen behind the curve, Abenomics in Japan is stalling, and China is making the painful adjustment to slower growth. Nevertheless, while international events are likely to get worse and energy prices are likely headed lower, I don’t envision a larger economic malaise spreading to the United States in the near term.

Understandably, investors are currently spending the majority of their time worrying about oil and where the price bottom is. The United Arab Emirates’ energy minister announced over the weekend that OPEC is standing behind its Nov. 27 decision not to cut the group’s collective output target of 30 million barrels per day, which highlights the blatant lack of pricing discipline within the organization. As oil continues its decline, pressure is increasingly mounting on credit markets, especially high-yield corporate bonds, where energy-related borrowers represent 15-20 percent of the market.

The flip side is that as spreads widen, we get closer to the levels where large investors, such as pension funds and insurance companies, start to see value in the high-yield market, which should help stabilize credit spreads. Ultimately, what investors should prepare for is an extended period of depressed oil prices. Oil still has substantial downside room to run before reaching a level of stability. Once stabilized, depressed oil prices will create another “tale of two markets”— companies with oil exposure and those without.

Leading Indicators Suggest No Recession

Plunging oil markets and faltering growth expectations around the world have raised fears about the sustainability of the current U.S. economic expansion. The economic data, though, suggest that these fears are largely unfounded. The Conference Board’s Leading Economic Index, which is made up of 10 forward-looking economic and financial indicators, has not fallen since January and has been gaining momentum throughout the year. Until we see the LEI approach negative year-over-year growth, which has preceded the last seven recessions, the U.S. economy should continue to ride out the storm emanating from overseas.

The Conference Board Leading Economic Index and U.S. Recessions


Source: Bloomberg, Guggenheim Investments. Data as of 12/15/2014.

Economic Data Releases

U.S. Consumer Confidence and Industrial Production Rise

  • University of Michigan Consumer Confidence continued to make post-recession highs in the preliminary December reading, jumping to 93.8 from 88.8.
  • Industrial production beat estimates in November, rising 1.3 percent, the best month since May 2010, on the back of a surge in consumer goods output.
  • The Empire State Manufacturing Survey unexpectedly dropped to -3.6 from 10.2 in December, the lowest level in nearly two years.
  • The NAHB Housing Market Index inched down to 57 from 58 in December. Regional indexes were mixed, with the Northeast showing the largest decline.
  • Housing starts disappointed in November, falling 1.6 percent to 1.03 million. Multi-family starts were up while single family starts fell.
  • Building permits fell to 1.04 million from 1.09 million in November, a larger-than-expected decline.
  • The Consumer Price Index dropped to 1.3 percent in November, a nine-month low. Prices, excluding food and energy, ticked down to 1.7 percent.
  • The Producer Price Index continued to decline in November, reaching 1.4 percent, an eight-month low.

Mixed Data Out of Europe and Asia

  • Euro zone industrial production missed estimates for October, inching up just 0.1 percent. The prior month was also revised down to 0.5 percent.
  • The euro zone manufacturing PMI improved more than expected in December, reaching a five-month high of 50.8. The services PMI rose for the first time since July, up to 51.9.
  • Germany’s manufacturing PMI climbed back into expansion in December, beating expectations by rising to 51.2 from 49.5. The services PMI fell to a 17-month low of 51.4.
  • Germany’s ZEW survey rebounded slightly in December, rising to 10 from 3.3 in the current situation index. The expectations index experienced a sharper improvement, rising to the highest level since April at 34.9.
  • The French manufacturing PMI declined for a third straight month in December, falling to 47.9 from 48.4. The services PMI rose to 49.8, a four-month high.
  • The U.K. CPI dropped to 1.0 percent in November, the fifth straight decline and the lowest since 2002.
  • China’s HSBC manufacturing PMI fell for a second consecutive month in December to 49.5, entering contraction for the first time in seven months.
  • Industrial production in China slowed more than expected in November, dropping to 7.2 percent year-over-year growth from 7.7 percent.
  • Growth in Chinese retail sales accelerated to 11.7 percent year over year in November, the first acceleration since May.
  • Japan’s Tankan survey of large manufacturers inched down to 12 from 13 in the fourth quarter. The outlook index fell to a three-quarter low.
  • Japanese export growth slowed in November, dropping to 4.9 percent from 9.6 percent.


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