Quarterly Roundtable: Economic Engines in Need of an Overhaul
A Note about Risk: The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. As interest rates fall, the prices of debt securities tend to rise, and as interest rates rise, the prices of debt securities tend to fall. High-yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Moreover, the specific collateral used to secure a loan may decline in value or become illiquid, which would adversely affect the loan's value. Bonds may also be subject to other types of risk, such as call, credit, liquidity, interest-rate, and general market risks. Foreign securities generally pose greater risk than domestic securities, including greater price fluctuations and higher transaction costs. Foreign investments may also be affected by changes in currency rates or currency controls. With respect to certain foreign countries, there is a possibility of nationalization, expropriation, or confiscatory taxation, imposition of withholding or other taxes, and political or social instability that could affect investments in those countries. The securities markets of emerging countries tend to be less liquid, especially subject to greater price volatility, have a smaller market capitalization, have less government regulation, and may not be subject to as extensive and frequent accounting, financial, and other reporting requirements as securities issued in more developed countries. Further, investing in the securities of issuers located in certain emerging countries may present a greater risk of loss resulting from problems in security registration and custody or substantial economic or political disruptions. Foreign currency exchange rates may fluctuate significantly over short periods of time. They generally are determined by supply and demand in the foreign exchange markets and relative merits of investments in different countries, actual or perceived changes in interest rates, and other complex factors. Currency exchange rates also can be affected unpredictably by intervention (or the failure to intervene) by U.S. or foreign governments or central banks, or by currency controls or political developments.
No investing strategy can overcome all market volatility or guarantee future results.
There is no guarantee that the market will perform in a similar manner under similar conditions in the future.
Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.
The S&P 500® Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.
Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.
A basis point is one one-hundredth of a percentage point.
Covenant-lite loans are loans that come with fewer or less restrictive terms for the borrower and less stringent protections (covenants) for the lender. The relaxed terms may address collateral, financial condition of the borrower, and other qualifications.
The credit cycle refers to changes in the availability of credit. Early in the cycle, lenders often lend at low rates and make credit ieasy to obtain. Later, as lenders take on more credit risk, interest rates may rise and qualifying for a loan may become more difficult. Eventually, when the lender’s risks have been reduced, the cycle starts over, credit becomes more available again.
A debt ratio expresses the amount a borrower has in relation to its assets. A debt ratio of 20% indicates that the borrower’s debt equals 20% of its total assets. Debt ratios are used by lenders in making a decision about whether to make a loan.
Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments, and exports less imports that occur within a defined territory.
An initial public offering (IPO) refers to a company’s first sale of stock to the general public. IPOs are more common when the stock market is performing well.
The interest coverage ratio is a measure of a borrower’s ability to pay the interest on its debt. It is the borrower’s earnings before interest and taxes divided by the interest expense.
The price-to-earnings [P/E] ratio is a measure of stock valuation. It is the ratio of a stock’s price to its earnings per share.
Prudential banking regulation governs the activities of deposit-taking institutions and is concerned with capital requirements, asset quality, and other factors that can affect a bank’s risk exposures.
Shadow banking consists of a variety of companies, including hedge funds, insurance companies, and money market mutual funds, that are involved in lending and other bank functions but which are not regulated by banking authorities.
The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. This material is not intended to be a recommendation or offer to buy or sell any security or to adopt any investment strategy, and investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.