It has been a very strong run for the markets since the great recession in 2008/2009. The S&P 500 Index has returned over 200%1 since 12/31/08, and the U.S. High Yield Market is not far behind at over 180% (as measured by the Bank of America Merrill Lynch U.S. High Yield Index). Following such strong runs over the past 8+ years, one has to wonder how much longer this can be sustained.
The reflation metrics commonly cited as part of the “Trump trade” are equities, commodities, currencies and interest rates. Another metric that also supports the idea of stronger business confidence, and which has implications for the credit markets, is the level of merger and acquisition (M&A) activity since the election. As seen in this week’s chart, M&A has been very strong for the last couple of years, and the 2017 year-to-date (YTD) comparison implies that the M&A activity has again accelerated. The last time we experienced this many strong years consecutively was 2005-2007, when the value of M&A peaked at $4.2 trillion and with a total deal count of 28,730. Following 2014-2016, we had seen a very similar pattern, with three consecutive years of above-average M&A deal value (peaking in 2015 at $4.9 trillion). One could make the argument that we’ve already come too far and deal volume was slowing as animal spirits dissipated. However, since the Trump trade began after the election, management teams and executive boards have been seemingly eager to put capital to work, and 2017 is off to a higher start than the same period last year, with activity spiking approximately 57%. Is this the final capitulation or the beginning of an extended cycle?
Key Takeaway:Continued levels of M&A activity at record deal values is going to lead to elevated levels of new issuance in the corporate bond markets. We are prepared for the wave of new issuance to continue as corporations borrow at what feels like lower and lower yields. The demand to participate in these deals continues to be very strong as fixed income asset managers are constantly trying to put capital to work. As long as asset allocations remain invested in fixed income at similar levels, there will be plenty of cash for corporate management teams to borrow to satisfy their animal spirits.
1 cumulative return assuming dividends are reinvested in the market
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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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High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
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