Macroeconomic Backdrop for Credit:
Corporate earnings continued to improve in the second quarter after a very strong start to the year. With approximately 70% of the S&P 500 companies reporting second quarter numbers thus far, 82% had positive sales growth (aggregate growth of 5.70%) and 76% had positive earnings growth (aggregate growth of 10.47%). If this pace continues, it will mark the second strongest quarter in the last five years, behind only the first quarter of this year. More importantly, the earnings outlook for the balance of the year remains solid, which led to 5 new record highs in the S&P 500 index in July. This is despite the fact that meaningful tax reform and/or fiscal stimulus seems unlikely to occur before 2018, at the earliest, as the new administration has been unable to demonstrate any substantial progress towards any of their legislative priorities.
In addition to stronger corporate earnings, softer than expected inflation data resulted in a more dovish tone out of central bankers which provided comfort to fixed income investors who were previously worried about the impact of tighter monetary policy on total returns. Even the somewhat surprising statement from the FOMC that suggested they may begin balance sheet normalization in the fall failed to have a significant impact on the market.
The oil markets also rebounded in July. Demand came in stronger than expected while OPEC reiterated its commitment to comply with the production cuts. As a result, crude inventory levels declined much more rapidly than originally anticipated which caused oil prices to rise 9% during the month.
In response to the above events, the VIX fell to its lowest level in 24 years in July. New money flowed into the asset class, which allowed the market to easily absorb the significant new issue supply during the month, and caused spreads to tighten.