While the Equity Markets Gyrate, the Corporate Bond Market Remains a Relative Sea of Calm
The price action in most financial markets so far this month has been dizzying. This may be best characterized by the CBOE’s well know (and recently well publicized) VIX index, which is a gauge for equity market volatility.
However, as is typical for our market, high quality bonds have behaved much calmer in recent days. And while longer-term interest have risen, which dinged prices for long bonds, most tenors and sectors within the investment grade space have produced flat returns so far this month.
One area of our universe that could see some impact from equity price volatility is corporates, as credit spreads tend to trade with some correlation to equity prices. This has been a good quarter and year for corporate profits, and it appears we’ll be in the money for a while longer. It is hard to imagine a deep sell-off when the economy is growing and corporate profits are so strong.
Corporate earnings are anticipated to be up 10.7% in 2017, and the forecast for 2018 is a 20.3% increase. Expectations are rarely this good. As the chart shows, it is hard to foresee a recession when corporate earnings are strong and growing stronger. We all know EPS growth forecasts often represent the triumph of hope over experience, yet we do have more than a few good reasons to be hopeful. A synchronized global economic expansion, continued central bank monetary accommodation, gradually higher interest rates helping banks and financials, a recovery in the energy industry lead by higher oil prices, a weaker dollar supporting overseas sales, and of course a large tax cut for corporations—all are juicing profits. We think these positive factors can hold sway for a few more quarters, so hope is alive!
Hope is certainly evident in the corporate bond market. While the equity markets gyrated last week, the corporate bond market was a relative sea of calm, with some (but not significant) volatility in spreads. All this makes sense to us. Great profits, continued monetary accommodation and the willingness of banks and capital markets to lend are all supportive of corporate spreads, and all dampen spread volatility.
While we are enjoying the current hopefulness, experience teaches us to keep an eye out for changes in the landscape. At SNW we are watching inflation and interest rates, which, if they increase more than expectations, can weaken many of those factors leading to strong earnings. But at the moment, we’re in the money.
Source: Bloomberg, BCA Research, the Wall Street Journal
Most Read IRIS Articles of the Week: Feb 19-23
Here’s a look at the Top 11 Most Viewed Articles of the Week on IRIS.xyz, Feb 19-23, 2018
Click the headline to read the full article. Enjoy!
I’d like to introduce you to Peggy. Born in 1956, Peggy will be 62 in 2018. She has worked in retail her whole life, the past twenty-five years spent in management. Peggy divorced from her husband 14 years ago, is still single and has no children. — Dana Anspach
This week the markets shrugged off last week’s fears and went back to the slow and steady melt up, despite economic news that looked likely to once again rock the boat. — Lenore Elle Hawkins
Themes established in 2017 across a wide range of markets and factors continued to resonate through the fourth quarter. Economic growth was strong and supportive of equity markets across the globe, a range of volatility measures reached all-time lows, and business and consumer sentiment remained elevated. — Yazann Romahi and Garrett Norman
Advisors and investors that feel they are hearing more and more about commodities and the corresponding exchange traded products in recent months are right. That is a natural result of dollar weakness and yes, the greenback is floundering again in 2018. — Tom Lydon
As the industry works to cope with new regulation, wades through an outpouring of new products, learns to satisfy investors’ shifting priorities and manages the active-passive debate, the viability of business units will be questioned, and at times radical measures will be taken. — Peter Hopkins
My hope is that this article points out some opportunities for you to make more money and serve your clients at a higher level and that you decide to do something about it. — Bill Bachrach
Whether the market is flying high or taunting your emotions with new lows and some bumpy volatility, here are four things every investor should keep in mind ... — Lauren Klein
Why financial advisors NEED to understand much more clearly the power of good digital market. With tools like AdvisorStream, it’s easier than ever to get the content you need to drive leads and referrals today! — Kirk Lowe and Matt Halloran
How do some firms and ideas go from nowhere to everywhere in a few short months? All of a sudden a restaurant becomes popular, a gas station gains a cult following, or a Broadway show becomes too popular to get a ticket for years. — Maribeth Kuzmeski
"Worldwide, $27.4 billion poured into fintech startups in 2017, Accenture reports, up 18% from 2016. With so much in play, it’s not surprising that 22 companies are new on this, the third edition of our list." — Chris Skinner
Many sensational headlines have been written the past few weeks about market declines, but two things have increased for sure: the viewership and the ad revenues of financial media organizations — Preston McSwain
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