The market is finally waking up to the prospects of not just viral contagion from coronavirus, but also to financial and geopolitical contagion. Now the contagion is spreading rapidly into the credit markets where not only energy bonds are plunging but other sectors like airlines, lodging, and retail are sure to follow suit. Then there is the knock-on effect to corporate earnings and cash flows across a broad swath of industries once the world enters a global recession which now appears to be inevitable. We
The market is waking up to not just the viral contagion of coronavirus, but also to financial, economic, and geopolitical contagion.
by Scott Minerd, Guggenheim Partners
arrive at this moment with the overleveraged corporate sector about to face the prospect that new-issue bond markets may seize up, as they did last week, and that even seemingly sound companies will find credit expensive or difficult to obtain. Credit spreads have a long way to expand. BBB bonds could easily reach a spread of 400 basis points over Treasurys while high yield would follow suit with BB bonds at 750 basis points over and single B bonds at 1,100 basis points over. The risk is that it could be worse. As for stocks, technical analysis suggests that there should be support around 2,600 on the S&P 500, but in a recession scenario a level closer to 2,000 could be the ultimate outcome.
Economic Wisdom From Guggenheim Partners
Macroeconomic and Investment Research
In this five-part video series, Brian Smedley, Head of Macroeconomic and Investment Research, discusses how investors can navigate a broad range of market risks as we approach the end of the current business cycle.
Part 1: Credit Cycle Downturn
The markets will be tested by passive investors’ reaction to ratings downgrades.
Part 2: Crowding Out
Government borrowing and the Fed balance sheet runoff are flooding T-bill supply, contributing to rising rates, and affecting other borrowers.
Part 3: Oil and Geopolitical Risk
Geopolitical tensions could give rise to substantial supply disruptions.
Part 4: The Pig in the Python
The transitory effects of fiscal stimulus won’t offset a slow growth outlook.
Part 5: Navigating Your Portfolio
Ideas for portfolio positioning amid tight credit spreads and a flattening yield curve.
About The Guggenheim Expert
Brian Smedley has been Managing Director and Head of Macroeconomic and Investment Research at Guggenheim Investments, Inc. since November 16, 2015. Mr. Smedley joined Guggenheim Investments from Bank of America Merrill Lynch, where he served as its Director of U.S. Rates Research. He served as United States Rates Strategist since June 2010. Prior to this, he spent five years at the Federal Reserve Bank of New York, including Senior Trader and Analyst for the Buy-Side Analysis and Relationship Management Staff and Foreign Exchange and Investments Staff, and Senior Economic Analyst for the Emerging Markets and International Affairs Group. Previously, he was employed at the FX desk and in the emerging markets group as a Senior Economic Analyst covering Latin America macroeconomics, commodity markets, and sovereign risk issues. He served as Director of BofA Merrill Lynch. As a graduate student he worked at the U.S. Treasury Department and the White House Council of Economic Advisers. He ranked number three in the Short Duration category of the Institutional Investor Fixed Income Research survey in 2011 and 2012. Mr. Smedley graduated Summa cum Laude with a B.S. in Finance and Economics from Utah State University and an MA in International Development Studies from the Elliot School of International Affairs at George Washington University.
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