Any ideas about junk bonds outperforming because of the booming economy confirmed by a monetary policy rate hike has been killed and buried. Conventionally, it was assumed that interest rates are not the primary “risk” parameter for high yield corporates of all flavors, and that is correct. Junk issues and lower tier obligors are creatures of the credit cycle, thus we are forced to conclude that the blowup in corporates spreading down the scales is a direct contradiction to “transitory” and the economic scenario envisioned by rising interest rates (as a matter of intentional policy).
Now that it is becoming more widely accepted that oil prices are not set for the expected return, even among economists that vociferously resisted any such idea, that leaves a few other fundamental conventions twisting precariously in the blowing financial winds. Oil prices were not long ago the primary, if not only, silver lining that could be derived from the oil collapse. If oil prices were going to work against the “anchored inflation expectations” that monetary policy depends so much upon, at least there was some “benefit” in that low oil prices were widely predicted to spur some sectors and if not completely offset any damage to inflation expectations then at least provide a cushioning “tax cut.”
Mainly, retailers and transportation sectors would be at the front end of that “stimulus.” If you take the part that oil prices are meaningless in relating the general economic direction, both of those sectors should have done, and continue to do, very well as oil prices provide benefits on top of the economy as it continues to perform. From February:
But in general, low oil prices “are an unambiguous positive for the U.S. economy,” says Chris Lafakis, Moody’s Analytics’ senior economist, who notes that there will be many industries that could reap higher profits as a result…
Many industries that depend heavily on consumer spending will get a big boost from lower oil prices, says Lafakis. “Lower oil prices act as a tax cut,” he says, adding that if oil prices fall from an average of $93 per barrel in 2014 to an average of $63 in 2015, that would be the equivalent of a $90 billion tax cut for the American consumer. “That’s not a small stimulus we’re talking about,” he says.
Lower gas prices will be a big boon to the transportation industry, says John Challenger, the CEO of staffing firm Challenger, Gray & Christmas–thanks to the fact that a lot of transportation companies’ costs come from fuel. Thus shipping companies like FedEx FDX, -0.69% and UPS UPS, +0.08% freight airlines, trucking companies and marine transportation companies are likely to see a boost.