Investing is challenging because, like many disciplines, it requires predictions and analysis of myriad variables. However, today’s environment is unusual in that the path forward for the economy and financial markets is likely to be dictated by a single factor: the trajectory of inflation. Of course, other data points, such as labor market statistics, manufacturing data, and consumer activity, require attention.
As we begin 2022, our economic and market views hinge on the interplay among the public health situation, inflationary pressures, and monetary policy. The COVID-19 Omicron variant has thrown yet another roadblock into our earlier expectations for economic normalization and recovery of the ailing services sector. However, the latest viral strain will serve to delay, not derail, our expectations for a reversal in the relative dominance of the goods side of the economy over services.
Vigorous lending driven by the desire for yield created a banner year for loan markets in 2021. Per S&P Global Leveraged Commentary and Data (LCD), the “U.S. leveraged loan market is on a record pace for issuance in 2021,” with total institutional loan volume at $487 billion as of the end of Q3 2021.1 As a result, the U.S. loan markets have drawn in $25.9 billion in investor inflows, while the volume of primary Collateralized Loan Obligation (CLO) issuance reached $46.