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.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"). Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.
Investing involves risk, including the possible loss of principal.
*Assets under management is as of 12.31.2020 and includes leverage of $13.7bn. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.
Guggenheim Investments. All rights reserved.
Research our firm with FINRA Broker Check.
• Not FDIC Insured • No Bank Guarantee • May Lose Value
This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. Investing involves risk, including the possible loss of principal.