A Selective Look at Corporate Credit

US Economic Overview and Market Backdrop

Several US economic indicators have improved since the start of the year. We’ve seen robust job growth, an upgraded gross domestic product forecast, incremental improvement in consumer spending and rising consumer confidence. And, the last corporate earnings reporting cycle saw many upside surprises.

Against a backdrop of strong fundamentals in corporate America, the market has so far mostly shrugged off controversial US health care legislation, a dangerous and costly US hurricane season and tensions around North Korea’s nuclear ambitions.

In terms of monetary policy, the US and global financial markets have returned to levels of stability that we believe no longer warrant the use of aggressive or unconventional monetary policy tools. These tools served their intended purpose during the depths of the 2007–2009 Global Financial Crisis.

That said, the Fed’s move to unwind its balance sheet following years of atypical easing policies highlights a non-traditional framework. There is a lack of historic precedent for the market response to these actions.

Like many investors, we take the US Federal Reserve’s (Fed’s) policy actions in 2017 as a vote of confidence that the economy can now grow without persistent central bank support. We also think the Fed has signaled its policy intentions clearly enough that a disorderly debt-market decline similar to 2013’s “taper tantrum” appears unlikely.

The political environment in Washington, DC, also remains a challenge. Several of the pro-growth economic policies US President Trump’s administration has touted have been slow to develop.

Nonetheless, we are hopeful for potentially positive changes to come. Our focus remains on specific company fundamentals, the core economic backdrop and bigger-picture secular growth trends. Additionally, any meaningful US policy progress relating to major tax reform, financial system deregulation and/or infrastructure spending could give the US equity market—currently near all-time highs—a further boost.

Economic fundamentals still support a solid outlook for corporate profits, according to our analysis.

In line with a positive assessment of economic fundamentals, we view credit conditions as favorable. Interest rates remain low, corporate balance sheets generally remain strong and debt-service costs appear manageable. Markets still appear receptive to debt offerings. At the same time, we think investors should consider preparing for rising volatility following an unusually quiet period for global financial markets in general.