The Waiting is the Hardest Part
with Randy Masel, Managing Director (June 2, 2015)
The financial markets took a snooze in May. There were only three trading days last month where the S&P 500 moved more than 1%, the Treasury market was somnolent, and the iShares High Yield Corporate Bond ETF (the largest high yield ETF) traded in a range of less than 1%. For the record, the S&P 500 posted a 1.3% total return in May and the yield on the five-year US Treasury bumped from 1.43% to 1.49%. The Bank of America Merrill Lynch High Yield II Master Index generated a 1.2% return and the yield-to-worst for the index fell from 6.04% to 5.93%. Spreads narrowed 10 basis points to +4.61% over corresponding Treasuries. There was a bit of action in the currency markets, with the dollar gaining 2% and 4% against the euro and yen, respectively.
While stock indices were fairly static on the whole, there was plenty of churning below the surface: 27% of the stocks in the S&P 500 ended the month either up or down 5% or more. With stock indices flirting with all-time highs and bond yields just off historic lows, investors’ angst is high and patience is low. As a result, companies with just mildly disappointing news have been taken to the woodshed. For example, United Rentals (a stock we like), saw its stock price drop almost 15% after its CEO said that revenue in May “is coming in a little softer than we had in mind.” Hardly earth shaking.
The market’s skittishness has not been aided by the lack of resolution to two key issues that have been weighing on it since the beginning of the year: the timing of the Federal Reserve Bank’s first rate hike and the fate of Greece’s bailout. With economic data tepid at best (first quarter GDP down .7%, e.g.), a rate lift-off is unlikely until September at the earliest. Given that the Federal Reserve has said that its actions will be measured and data dependent, the first rate hike will most likely be a modest 25 basis points, a well anticipated move unlikely to meaningfully shake the market. The pace and trajectory of rate increases beyond the first one are the real concerns, in my view. A rapid acceleration in the Fed Funds rate should be accompanied by much stronger economic data, providing the backdrop for corporate earnings growth and tempering the impact of higher interest rates on stock valuations. The market will just have to wait another year to see if this is true.
The resolution to Greece’s fate is more imminent, as repayments to the IMF loom and the current bail-out program expires at the end of June. Hopefully cooler heads prevail and some form of new deal/extension is reached. However, the rhetoric and body language around the negotiations have been so bad that default (either accidental or intentional) cannot be discounted. The market will just have to wait a month to see if a Greek tragedy is averted.
Randy Masel manages a high yield corporate bond strategy that he created and launched when he joined Granite Springs Asset Management in January 2014. He also manages Granite Springs’ Tactical Global Equity strategy.
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.
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