with Randy Masel, Managing Director (May 4, 2015)
What worked for the first 3 ½ months of 2015 stopped working in the tail part of April. Interest rates around the world started backing up, the US dollar weakened against other currencies, biotech stocks got hit, and even Apple common stock dipped. Trees don’t grow to the sky, and it’s fair to say that valuations in certain risk assets were looking stretched (negative sovereign bond yields throughout Europe being a prime example). The “bubble” adjective started creeping into market commentary. It is perhaps more likely that the price action at the end of April was induced by investors looking to lock in gains in what had worked as month-end approached. The first two trading days of May have seen a rebound in what was for sale at the end of April, lending some credence to the notion of position squaring.
Putting the last month in context, despite the S&P 500 and NASDAQ composite indices reaching new highs in April, it is hard to look at equities as being in a price bubble. The market’s skittishness towards the end of April is symptomatic of the queasiness equity investors feel about stocks. A recent article in the Financial Times noted the increasing level of cash held by institutional funds. Moreover, a recent Gallup poll indicated that 55% of adult Americans have investments in the stock market, as compared to 65% in pre-crash 2007. As for bonds, the European Central Bank is at the beginning, not the end, of its open market purchase program. Here in the U.S., recent economic numbers all but ensure that the Federal Reserve will not bump its targeted funds rate before September at the earliest. There may be irrational exuberance in pockets of the markets, but by and large investors appear to be looking at risk rationally.
The S&P 500 was up just less than 1% for April on a total return basis and was 1.9% higher through the first four months of the year. The Bank of America Merrill Lynch High Yield II index posted a 1.2% gain in April and is 3.77% higher for the year. The yield-to-worst call for the high yield index was just north of 6% at the end of the month; the spread over comparable Treasuries narrowed 23 basis points to a still reasonable +471. The high yield market entered 2015 weakened by the sell-off in commodities and interest rate fears. The bounce in commodity prices and relatively benign interest rates (five-year US Treasury rates are still lower than where they started the year) have aided high yield’s strong performance year-to-date. From here, high yield gains are likely to be more limited: if high yield only earns its coupon for the rest of the year, total returns for 2015 would be a very respectable 8.3%. Similarly, assuming negligible to negative earnings growth, equities could chop around current levels for the rest of the year, resulting in a return of roughly 3.2% including dividends. While that return may be considered as paltry, it comes after the more than 46% rise in stocks in the two years prior.
This may seem like a buzz kill for those stock investors that have enjoyed the recent run in the market. However, for the remainder of 2015, outperformance of the market may become easier to achieve for active managers, not harder (how I hope this is true). Without a rising tide to lift all stocks, sector and individual stock selection will become more important, as will the timing of trades.
Randy Masel manages a proprietary high yield corporate bond strategy that he created and launched when he joined Granite Springs Asset Management in January 2014. Mr. Masel has more than thirty years of experience in the credit markets, as a banker, credit analyst, and a portfolio manager. He began his career on Wall Street as a corporate bond analyst for Paine Webber, Inc. There, he held several senior level research positions, ultimately becoming Managing Director responsible for the firm’s entire U.S. credit research department. Prior to joining Granite Springs, Mr. Masel was a portfolio manager and credit analyst with JAE Credit. He also formerly held senior level positions with Millennium Partners, LP, Moore Capital Management, and James Caird Asset Management. Mr. Masel holds a BA from Washington University and a MBA from Harvard University. Mr. Masel also holds the FINRA Series 65 license.
Granite Springs Asset Management, LLC is a privately held SEC-registered investment advisor that specializes in fixed income portfolio management and tactical asset allocation investment strategies for private clients, family offices financial advisers, insurance companies, pension plans, and other institutional investors. The investment philosophy at Granite Springs is based on two principal beliefs; that asset allocation is the most important investment decision and; that disciplined risk management leads to superior returns over time.
Granite Springs Asset Management LLC is a Registered Investment Adviser with the U.S. Securities and Exchange Commission and qualified to do business in various state jurisdictions where required. Nothing in this article shall constitute investment advice. This article is for informational purposes only and the opinions expressed are the author’s own.
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