While that is a very important point, and high yield can reverse and begin a negative spread widening cycle at any time, rich pricing is the only negative that we can find. We see the U.S. economy as continuing in a slow but steady growth mode, but an important bullish development has been stronger growth, particularly in Europe and Asia, that could help keep the economy cruising along for a number of quarters.
Modest high-yield issuance is another bullish factor, as issuance has fallen by over 8% since peaking in early 2016. This means that the huge sums of money chasing yield in a yield-hungry world are chasing a smaller pool of money. This is a bullish supply-demand factor that we will watch closely for reversal.
Finally, while high-yield bonds are rich by any conventional valuation measure, prices can continue to rise from here. From 2004 through early 2007, high-yield bond yields were even lower than they are now and continued that way for years. Thus, while valuations indicate that high-yield returns will be much more modest going forward, history tells us that they can continue to be positive for even a period of years.
Looking forward to the rest of 2017, we are more sanguine regarding the second half of the year, as historically the second half of a new President’s first year has been volatile and not very profitable for investors. We expect our portfolio to take on a more defensive tone than it has had; so far this has only manifested itself in a focus primarily on large-caps. There could particularly be some market volatility surrounding the debt limit increase. We would expect that such weakness likely will present a shorter-term buying opportunity. Historically, the second half of a new President’s first term and the first half of the second year of a new President’s term have been relatively weak times for the markets. However, following this time of weakness, a strong rally ensues. So while we may expect some short-term weakness in the equity markets, our longer-term outlook remains bullish. Credit markets remain strong, and their continued strength will be a key metric to watch going forward. If we do see high-yield bonds lose relative strength, we will not hesitate to take a more defensive stance within our fixed income allocations.
This is not a recommendation to buy or sell a security or to adopt a particular investment strategy. The opinions expressed are those of Clark Capital Investment Management Group and are subject to change without notices. The opinions expressed are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Clark Capital reserves the right to modify its current investment strategies based on changing market dynamics or client needs.
This document may contain certain information that constitutes “forward-looking statements” which can be identified by the use of forward-looking terminology such as “may,” “expect,” “will,” “hope,” “forecast,” “intend,” “target,” “believe,” and/or comparable terminology. No assurance, representation, or warranty is made by any person that any of Clark Capital’s assumptions, expectations, objectives, and/or goals will be achieved. Nothing contained in this document may be relied upon as a guarantee, promise, assurance, or representation as to the future.
The relative strength measure is based on historical information and should not be considered a guaranteed prediction of market activity. It is one of many indicators that may be used to analyze market data for investing purposes. The relative strength measure has certain limitations, such as the results being impacted by an extreme change in a security price.
It should not be assumed that any of the securities transactions, holdings, or sectors discussed were or will be profitable, or that the investment recommendations or decisions Clark Capital makes in the future will be profitable or equal the performance of the securities discussed herein.
There is no guarantee that any of the securities discussed herein will be included in or excluded from an account’s portfolio at the time you receive this report. All recommendations from the last 12 months are available upon request.
Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed.
The benchmark is the Barclays U.S. Corporate High-Yield Index. The Barclays U.S. Aggregate Bond Index is a supplemental benchmark. The Barclays U.S. Corporate High-Yield Index covers the U.S. dollar-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The Barclays U.S. Aggregate Bond Index covers the U.S. investment-grade fixed-rate bond market, including government and credit securities, agency mortgage pass-through securities, asset-backed securities and commercial mortgage-based securities. To qualify for inclusion, a bond or security must have at least one year to final maturity, and be rated investment grade Baa3 or better, dollar denominated, non-convertible, fixed rate and publicly issued. The benchmarks for this composite are used because the Barclays U.S. Corporate High-Yield Index is generally representative of U.S. high yield fixed income and the Barclays U.S. Aggregate Bond Index is generally representative of broad based U.S. fixed income. The volatility (beta) of the Composite may be greater or less than its respective benchmarks. It is not possible to invest in these indices.
Clark Capital Management Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Clark Capital and its investment advisory services can be found in its Form ADV Part 2, which is available upon request.