Guggenheim Investments released its latest report, the Fourth Quarter 2018 Fixed-Income Outlook, which was titled “Jogging to the Exits.” However, the thought of a recession they foresee in the first half of 2020 might have investors running rather than jogging, but the investment team outlined strategies on how investors can adjust their portfolios accordingly to prepare.
“Economic growth has been strong, but while others trumpet the current moment of peak growth in this business cycle, our investment team is focused on the recession that we foresee beginning in the first half of 2020,” said Scott Minerd, Global CIO and Chairman of Investments. “Investors must understand the history of market performance during the run up to past recessions to appropriately position their portfolios.”
The report mentions that in credit markets, spreads typically tend to stay flat in the penultimate year of the expansion before widening in the final year. Furthermore, rising defaults and increasing credit and liquidity risk premiums drive a sharp pullback in the performance of high-yield bonds before and during recessions–rising yields were partly to blame for the October sell-offs that had equities and bond markets falling in unison.
“The key here is to manage this shift in a timely manner,” Minerd said. “So as our investment management team describes in these pages, we are focused on upgrading credit quality, reducing spread duration, and maintaining a barbelled yield curve position to take advantage of further curve flattening. Call it a jog to the exit rather than a run.”