2014 proved to be far more eventful than most predicted. Consider the nearly certain prognostication that rates would increase in 2014, the surprising impact the polar vortex had on economic activity early in the year, geopolitical headlines Russia/Ukraine, Middle East [Gaza, ISIS], Europe [Greece], etc.), Ebola fears, and last, but most certainly not least, the nearly 50% drop in the price of oil (more on this in a moment). As a result, while sentiment was relatively positive in the early part of the year, investor sentiment for credit risk reversed course and was relatively weak throughout the second half of the year.
In the third quarter, we wrote about how we believed the "risk sentiment" shift was driven by technical factors (more sellers than buyers) rather than fundamentals. Our view has simply been that the U.S. economy continues its slow, yet relatively steady march higher (with improvements in GDP and unemployment) and corporate credit fundamentals remains healthy (with modest corporate defaults and healthy profits). Indeed, the U.S. economy has proven resilient, and even surprising to many with better growth in the latter part of the year. However, despite what's occurring in the U.S., macro uncertainty continues to incite volatility in U.S. financial markets. As we enter 2015, oil will remain in the headlines given that its collapse will pressure economies that are heavily dependent on crude oil exports. The concern centers on whether we'll have an emerging market debt and currency crisis similar to that which we experienced in 1998 (when Russia defaulted on its debt). In addition, all eyes are going to be directed at whether the European Central Bank's (ECB) stimulus program (its own version of QuantitativeEasing) is enough to improve the Eurozone economy. Speculation is already mounting regarding the potential size and scale of such stimulus.
For a discussion of notable events in the senior loan and high-yield market as well as an outlook for the future, click here to read the whole report.