Valuations across asset classes
Source: Bloomberg Finance, L.P., as of June 2, 2023. S&P valuations based on price-to-earning ratios. High yield bonds represented by yields above Treasuries (spreads) on the ICE BofAML U.S. High Yield Bond Index, Senior secured loans represented by yields above Treasuries on the Morningstar/LSTA Leveraged Loan Index. CLOs represented by JP Morgan CLOIE BBB Index.
- The stock market rally in 2023 has largely been characterized by two factors: Concentration and valuation.
- Said another way, more than 85% of gains in the S&P 500 year to date can be attributed to seven of the largest stocks in the index while market performance looks much weaker outside several megacap names.1 The rally also has taken place within unusually expensive territory (including for the aforementioned megacap tech stocks).
- Many investors may not consider this as a particularly attractive entry point for U.S. stocks, which are trading in the 78th percentile according to their price/earnings multiple, but conditions in the corporate credit market are very different.1
- As the chart highlights, credit market valuations declined significantly last year and have remained notably more attractive. Spreads on high yield bonds and senior secured loans are in the 40th and 26th percentiles, respectively.1 Spreads on collateralized loan obligations (based on discount margins) are in the 15th percentile.1
- High yield bonds and loans yield 8.6% and 9.2%, respectively, providing cushion to withstand potential spread volatility. Combined with generally supportive balance sheets, corporate credit conditions may provide a relatively attractive entry point for investors seeking to hedge their equity exposure.
