In a relatively placid week, global equity markets moved higher as world politics added fuel to the advance. News of the Trump administration’s decision regarding the Iranian nuclear deal led to a 3% gain in the price of seaborn crude oil, with North Sea Brent finishing the week at $77.12 per barrel. As a result, energy was last week’s top performing sector, gaining 3.9%. Following close behind with a gain of 3.4% was the industrial sector, which enjoyed a broad advance led by the defense stocks. Technology shares took bronze last week at 3.3%, led by a strong advance in the semiconductor stocks. Last week’s laggards were the utility (-2.2%) and consumer staples (-0.3%) sectors on, oddly enough, the combined fears of higher interest rates and weak inflation. The ten-year Treasury bond continues to hover just below 3%, finishing the week at 2.97%. Despite the stagnation in Treasury yields, the corporate debt term structure continues to rise. Since the end of March, the investment grade ten-year has risen a quarter of a point and now sits just below 4%, at 3.9339%. Last week, we experienced a bit of an anomaly. Generally, gains for large cap stocks have been accompanied by weakness in the price of small companies. This past week, both advanced with only the slightest advantage to small cap. International equity markets enjoyed a positive week, as the developed MSCI EAFE® markets added 1.4%, and the MSCI Emerging Markets gained 2.5%. Agricultural prices experienced a volatile week, as wheat prices fell 7%, followed by soybeans and corn losing 3.2% and 2.2%, respectively.
Last week, I closed by saying that we would be on the lookout for potential threats to clients’ portfolios. Corporate debt is one of those threats being monitored. By way of background, over the last three years, we have witnessed an unprecedented leveraging of America’s corporate balance sheets with overall debt to equity at roughly 40%. In an environment of low interest rates and modest growth, the temptation to lever up with cheap debt and retire relatively expensive equity made sense, particularly if senior management’s compensation was tied to the stock price. Looking at the current servicing of that debt, everything seems fine as cash flows easily cover the interest expense. But, as we witnessed with the last credit cycle in the mortgage market, it is not so much the cost of credit but its availability that poses the greater threat. In Exhibit 1, you can see the maturity structure for the Bloomberg Barclays U.S. Aggregate Index, one of the broadest measures of the market. A significant amount of the outstanding debt will need to be rolled over, or paid off in the next four years. This is something to keep in mind when looking at structuring the fixed portion of an investment portfolio.
Exhibit 1 (Source: Bloomberg)
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