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Low Equity Returns for Rest of 2019 Could Spur Activity in High Yield

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This article was originally published on ETFTrends.com.

U.S. equities rallied in 2019, but for investors who are just starting to get back into the stock market after a tumultuous year-end to 2018 could have missed the meat of the move, according to Goldman Sachs. As such, lower equity returns for the rest of 2019 could translate to more interest in high-yield options.

If the U.S. capital markets are to continue its rally to start 2019, it may have to come from other sources as Goldman Sachs is forecasting lower returns for the rest of the year.

"The rally we expected has happened swiftly, and given this we see relatively modest returns on equities from here," Goldman analyst Sharon Bell said in a note to clients Tuesday.

The early rally came as U.S. equities finished their worst year in over a decade. The Dow fell 5.6 percent, while the S&P 500 lost 6.2 percent and the Nasdaq Composite fell 4 percent.

Through Monday's close, the Dow is up 8.2 percent, the Nasdaq 10.73 percent and the S&P 500 8.7 percent. However, flatter and more range-bound market movements could be in store through the rest of 2019.

"While we saw a bounce in equity markets in 2019, we also argued that this would be followed by the resumption of a 'flat & skinny' trading range, with relatively low equity returns," said Bell.

Furthermore, Bell is suggesting that an "idiosyncratic approach" may be a more plausible option as opposed to defensive or cyclical plays in the stock market. One option could in the high-yield fixed income space.

A High Yield Option

A volatile end to 2018 no doubt elicited a risk-off sentiment that permeated throughout the capital markets, causing high-yield bond funds to experience an aggregate one-month outflow of $1.45 billion, according to data from XTF. However, it appears investors could be turning a corner on high-yield thus far in 2019.

With bond market mavens warning investors of headwinds in the fixed income space like the possibility of inverted yield curve, rising rates and BBB debt sliding out of investment-grade, investors need to be keen on where to look for opportunities.

One area is within the municipal bond space, which may have gotten a boost following last November’s midterm elections. In particular, with respect to infrastructure spending—it’s one of the few things, if any, that Democrats and Republicans can agree on, but with the newly-divided Congress, this could fuel municipal bond ETFs.

One option would be the VanEck Vectors High-Yield Municipal ETF (HYD) , which seeks to replicate the performance of the Bloomberg Barclays Municipal Custom High Yield Composite Index. HYD normally invests in securities that comprise the benchmark index, which is comprised of publicly traded municipal bonds that cover the U.S. dollar denominated high yield long-term tax-exempt bond market.

During the volatile period between November 8,2018 and December 24, 2018, HYD was up about 2 percent as a majority of U.S. equities were experiencing deep declines. According to Michael Cohick, Senior ETF Product Manager at VanEck, this presented an opportune time " for investors to consider both reengaging the tax exempt bond market and positioning in the intermediate part of the investment grade yield curve."

Low Equity Returns for Rest of 2019 Could Spur Activity in High Yield 1
Low Equity Returns for Rest of 2019 Could Spur Activity in High Yield 1

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