Wednesday, July 11, 2012

Based on history, corporate credit should be outperforming equities

As discussed in this post, US equities have outperformed (albeit at much higher volatility) US corporate credit this year - both HY and IG.

S&P500 vs HY and IG liquid indices YTD total return (click to enlarge)

But is this outperformance consistent with the current economic environment in the US? Here is how the asset classes have performed during different ranges of GDP growth from 1980 to today .

Source: DB ("SPX TR" means S&P500 total return - including dividends)

Since we are likely to be in the middle bucket for 2012, credit should be outperforming equities. If we make this comparison using non-farm payrolls monthly changes, we get a similar result.

Source: DB (click to enlarge)

Either we are going to be returning to the first quarter type job growth in the US later this year (which seems unlikely) or equities look expensive relative to credit.

Non-farm payrolls monthly
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