Deja vu all over again
Market behavior and economic developments often remind investors of the past, but deja vu is not as common. Yet, having that sensation of “I’ve been here before” about the current debt and credit markets is justified because current price action actually is quite similar to late 2015 and early 2016.
That period saw the last disinflationary scare in global markets tied to a slowdown in Chinese and global growth, a renminbi devaluation, a dramatic fall in global commodities prices highlighted by oil and a volatile S&P 500. These were in proximity to the first Federal Reserve tightening in December 2015 and a subsequent delay in previously suggested rate moves in 2016 on the basis of market volatility.
The similarities between now and then are remarkable: an (all-but-certain) December Fed tightening and the prospect of a delay to further hikes against a backdrop of risk-asset volatility; uncertainty in global—especially Chinese—growth; the renminbi under duress; oil prices plummeting; and an S&P correction. Oh, and Brexit, which looms ever nearer in March next year.
The credit markets didn’t like the volatility in 2015-16 any more than they do now, with investment-grade corporate spreads widening 70-80 basis points then and 50-60 thus far in 2018. Emerging markets widened about 180 basis points, compared to about 140 basis points now. The only major difference is that high yield widened about 415 basis points then and only about 135 now. However, 2-5 year Treasury yields were 130 to 180 basis points lower in 2016 when spreads peaked. So the spread widening in the current selloff doesn’t need to be as extreme for high yield to offer equity-like returns.
Hopefully, the parallels of these two periods continue, because the earlier episode in 2015-16 did not lead to a recession. We think this will be the case again—it’s difficult to print back-to-back quarters of negative GDP growth with an economy at full employment and fiscal stimulus still in the pipeline. So we view this present widening of credit spreads as an opportunity to add.
The current investment environment is unsettling, but sometimes remembering and repeating the past is a good thing.