The current business cycle has become one of the longest on record, and based on our intermediate-term outlook, it could end up rivaling the 1991-2001 period in terms of its duration, as seen in this week’s chart. Interestingly, because of the muted nature of the recovery and broader deleveraging that has occurred, the excesses that typically build as growth accelerates have not emerged, and therefore the current credit cycle is less extended.
The overall narrative of sluggish but stable global growth, strengthened bank balance sheets and improving labor markets remains intact and serves to anchor the credit markets. In our view, the credit cycle is mature, exhibiting some typical late-cycle behavior, including low quality issuance, leveraged buyout activity, debt financed share repurchases and special dividends, but it is not in bubble territory. Moreover, central bank policy remains largely accommodative despite a gradual tightening on the horizon. Political risks aside, credit seems rationally priced but fully valued; low and declining default rates, solid domestic business fundamentals, moderate inflation, and range bound oil prices are offset by rising leverage, gradual monetary tightening, shareholder friendly activity and record new supply.Key Takeaway
The election of Donald Trump has been the big story since the beginning of the year, seemingly giving the business cycle a second wind as fiscal policy takes the baton from monetary policy. Despite heightened geopolitical risks, the failure to pass material legislation in Trump’s first 100 days in office and numerous controversies spanning a range of issues, the financial markets have rallied strongly since November. Instead of precipitating more volatility, the recent environment has produced the opposite effect, with the VIX hovering at multi-year lows. The reflation trade has faded a bit over the course of 2017, but for the most part the equity, credit, currencies and commodity markets are pricing in a fair degree of success.
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This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
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