Markets in a Minute

Biweekly insights on the latest global investment news from our Chief Investment Officers, Omar Aguilar and Brett Wander.

January 22, 2018

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  • Equities: A robust start to 2018

    Omar Aguilar, Ph.D.

    Chief Investment Officer,
    Equities and Multi-Asset Strategies

    A broad-based market rally

    Equity markets worldwide have experienced one of the strongest starts of a year ever, with many global indexes at or near all-time highs. However, unlike 2017, where Technology stocks and online retailers were responsible for the majority of the U.S. market’s returns and outperformed other sectors by a wide margin, the rally so far in 2018 has been more widespread. Year to date through January 22, Energy, Technology, and Health Care have experienced similar returns and have been the main drivers of returns for the S&P 500® Index.

    Fuel to the fire

    Tax reform, early indications of growing corporate earnings, and a stable economic outlook represent a positive backdrop for equities and risky assets in general.

    Positive impact from tax reform

    The direction that companies will take from the effective tax rate reduction is unclear but seems potentially beneficial. Shareholder-friendly actions with higher dividends and increased buyback programs are one possibility. The funds could also be given back to employees in the form of higher wages, which might improve economic growth through increased consumer spending. Alternatively, companies might increase capital expenditures, potentially improving their possibilities for future earnings growth.

  • Fixed Income: Credit spreads at 10-year lows

    Brett Wander, CFA

    Chief Investment Officer,
    Fixed Income

    Credit spreads reach a 10-year low

    Investment-grade credit spreads—representing the yield difference between a basket of investment-grade bonds compared with U.S. Treasuries—have fallen to only 85 basis points, or 0.85%. At this level, we’re approaching the pre-financial crisis spread of 0.76%, which was reached in February 2007. High-yield bonds, the riskier cousins of investment-grade corporate bonds, are also trading at very tight yield spreads that are only 3.20% over U.S. Treasuries.

    Equities and tax reform

    The pronounced narrowing of investment-grade credit spreads started in February of 2016, when spread levels were 2.00% over comparable U.S. Treasuries. Drivers of the subsequent spread compression have included: (1) the low and stable interest rate environment, (2) the demand for potentially higher-yielding assets, and (3) more recently, the Tax Cuts and Jobs Act of 2017.

    Don’t overreact

    Over the near-term, the investment-grade credit market may still have some room for continued outperformance compared with Treasuries, given optimism regarding the lower corporate tax rate and its corresponding benefits to the U.S. equity market. However, with valuations approaching pre-crisis levels, remaining outperformance may be met with increasing risks. So as always, prudent investing means resisting the temptation to overreact.