Preparing for the market turbulence that typically occurs in the run up to a recession.
Our Recession Probability Model and Recession Dashboard continue to suggest a recession is likely to begin in early 2020. Investors ignore the yield curve’s signal at their peril.
With the Federal Reserve (Fed) now targeting 2.00–2.25 percent on fed funds, tightening monetary policy is putting increasing pressure on corporate borrowers’ balance sheets across the leveraged credit landscape. We estimate that about 30–50 percent of the increase in short-term borrowing costs to date has passed through to the cost of debt for leveraged credit, depending on sector, and we expect this passthrough to increase over the next 12 months as the Fed raises rates.
While the U.S. economy remains on solid footing, exogenous risks threaten asset values, market confidence, and the strength of the U.S. economy.
To achieve long-term prosperity, rational immigration policy must become a priority.
Investors should stay guarded for exogenous shocks that could pull the next recession forward and cause markets to reprice credit risk.
If you want to see who the real victims of tariffs are, go look in the mirror.
Shortening duration, maintaining an investment-grade portfolio, and generating attractive yields do not have to be competing investment objectives for core fixed-income investors.
After several quarters of low volatility, tight spreads, and abundant liquidity, financial conditions are shifting.
New developments in fiscal policy, the labor market, and the neutral interest rate suggest that the expansion could extend into the latter half of our recession range.
As the Federal Reserve (Fed) tightens monetary policy further, we expect to see default rates higher next year. Loan recovery rates averaged 70 percent between 1990 and 2017 as a result of their secured status and seniority in the capital structure. Senior secured bond recovery rates averaged 58 percent over the same period, while senior unsecured bond recovery rates averaged 43 percent. We are concerned about distressed exchanges as the risk of re-default is high. About 7 percent of high-yield corporate bond issuers have defaulted in the past.
The Western Pennsylvania of my youth was a magical place, with bucolic parklands and architectural gems like Frank Lloyd Wright’s Fallingwater. The decline of the steel industry over subsequent decades has left this beautiful countryside scarred with abandoned mills and rife with the toxins and refuse of a dying industry. This experience informs my perspective when I think about how to tackle the problem of funding the estimated $2.5 trillion gap in annual global infrastructure needs: How can future development avoid the mistakes of the past?
The business cycle is one of the most important drivers of investment performance. As the nearby chart shows, recessions lead to outsized moves across asset markets. It is therefore critical for investors to have a well-informed view on the business cycle so portfolio allocations can be adjusted accordingly.
Investors need to be vigilant, as stocks and bonds are expensive, volatility is low, and risks lay ahead.
After years of relying on monetary policy to stabilize the U.S. economy, policymakers have redoubled their commitment to stronger pro-growth fiscal policies. As post-election Washington sets its sights on growth-oriented reforms, policymakers should remember that economic growth in any nation is determined by the four basic factors of production—land, labor, capital, and entrepreneurship.
Longer-term bond yields are near their highs for this cycle, while the environment for riskier assets like high-yield bonds, bank loans and stocks remains positive.