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Investors who are banking on a repeat of last year’s strong performance in stocks and corporate bonds in 2020 may want to sober up quickly if this bond-market guru’s predictions come to fruition.
Scott Minerd, the global chief investment officer for Guggenheim Partners, painted a pessimistic picture for financial markets this year, suggesting the foundation of the U.S. economy — the consumer — could start to show signs of buckling in the months to come.
In his list of investing themes to watch, Minerd focused on vulnerabilities in corporate debt due to historical levels of leverage among issuers, slower profit growth and weak pricing power among businesses, in a new outlook piece.
But even in 2019, Minerd expressed skepticism about the buoyancy in risky assets, which have benefited from the easier financial conditions fostered by central bank rate cuts and, in some instances, a renewal of their bond-buying programs last year.
Loose monetary policy has led investors to dive into a broad array of income-producing securities to make up for the ultralow, or negative, interest offered by government bonds. But this hunt for yield could turn perilous and catch complacent investors off-guard, said Minerd.
In previous commentary this week, Minerd described trading in corporate debt as a Ponzi market, “where the only reason investors keep adding to risk is the fear that prices will be higher tomorrow (or in the case of bonds, yields will be lower tomorrow),” in an allusion to economist Hyman Minsky’s theory that prolonged periods of financial stability could end up fostering the conditions for a downturn as investors took more risk than they could take.
Here’s his list of themes to monitor in 2020.
- Personal consumption will remain the engine of economic growth even as business investment and the manufacturing sector lags behind
- A strong housing market will contribute to U.S. growth, too, thanks to lower mortgage rates.
- The Federal Reserve’s balance sheet will grow but at a slower pace. That could undermine the narrative that the Fed’s liquidity injections and purchase of Treasury bills will continue to drive risky assets higher.
- Companies will struggle to pass down the cost of higher wages to their customers, eroding their profit margins.
- Corporate credit markets increasingly includes more lower-rated debt. Low rates of default and high levels of historical leverage remain unsustainable.
- A combination of slower earnings growth and more leverage will tip the scales and see more debt issuers being downgraded than upgraded.
- The labor market’s strength will continue to wane.
- Consumer confidence unlikely to keep rising as it would require the economy to produce a faster pace of job growth in 2020.
- Income inequality is likely to introduce increased policy uncertainty as disruptive policies, such as a wealth tax, gain traction even if their prospects for implementation are low.
- The U.S. Presidential election in November will be more consequential for the economy than in the past.
In equities, the major U.S. stock benchmarks slipped Tuesday after racking up gains for much of January. The S&P 500 index SPX, -0.27% ended the session lower, but still at its second-highest close in history, according to Dow Jones Market Data. The Dow Jones Industrial Average DJIA, -0.52% settled slightly lower too, but still at its third-highest close on record.
