Navigating Volatility within a Late Cycle Expansion
The U.S. economy is into its ninth year of growth — the third longest expansion in the post-war era.
The U.S. has entered the later stages of the business cycle. While there is reason to believe it will continue for some time as business and consumer surveys remain bullish, we must not ignore the fact that financial market valuations are elevated, credit conditions look suspect, and firms face an increasingly difficult environment for growth.
The Probability of a U.S. Recession Continues to Remain Low
Sources: Thomson Reuters Datastream, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis, 9/30/17. Last observable data point, September 2017. Smoothed recession probabilities for the U.S. are obtained from a dynamic-factor Markov-switching model applied to four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales.
Given the outlook for continued growth in a late cycle expansion, we recommend a more tailored investment approach where investors may want to:
- Begin to take profits where appropriate,
- Reduce risk exposure in high yield,
- Implement a more flexible investment approach across asset classes, and/or,
- Find alternative solutions.
Investment Insights: 3Q Trends & ThemesInterested in all four themes? Download the full version now.
About ETF and Mutual Fund Risk
All investments are subject to market risk, including possible loss of principal. Diversification cannot assure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results, which will vary. It is not possible to invest directly in an index.
Alternative investments are speculative, not suitable for all clients, and intended for experienced and sophisticated investors who are willing to bear the high economic risks of the investment.
BoA/ML U.S. Cash Pay High Yield BB-B Rated 1-5 Year Index is a subset of the BoA/ML U.S. Cash Pay High Yield Index including all securities with a remaining term to final maturity less than 5 years and rated BB through B inclusive.
Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade or better fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year.
Bloomberg Barclays U.S. Corporate High Yield Index measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The index excludes emerging market debt.
Credit Suisse Leveraged Loan Index is a representative index of tradable, senior secured, U.S. dollar denominated non-investment grade loans.
S&P 500 Index is widely regarded as the standard for measuring large-cap U.S. stock-market performance.
Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe.
Active Investing is an investment strategy involving ongoing buying and selling actions by the investor. Active investors purchase investments and continuously monitor their activity in order to exploit profitable conditions. Active management typically charges higher fees.
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio, in comparison to the market as a whole.
A Credit Spread is the difference in yield between a U.S. Treasury bond and a debt security with the same maturity, but of lesser quality.
Passive Investing is an investment strategy that aims to maximize returns over the long run by keeping buying and selling to a minimum. The idea is to avoid fees and the drag on performance that frequent trading can potentially cause.
Smart Beta defines a set of investment strategies that emphasize the use of alternative index construction rules to traditional market
The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.
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MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.