The roller coaster ride of the past two years is continuing, with US capital markets currently experiencing the longest extended period of high volatility since the 2008 financial crisis. Investors remain unsure about the future of the Russia-Ukraine conflict, other geopolitical concerns, and inflation in the US, all of which have contributed to negative equity market returns in the first quarter of 2022. While GDP growth was expected to slow, we expect growth to rebound in the second quarter and moderate thereafter. Our baseline expectation is for real GDP growth to slow to around 3% in 2022, a step down from 5.7% in 2021.
The outlook for equities is generally positive however, with a consensus 4% increase in 2022, albeit with a few bumps likely along the way. Global markets are down 5.5% in the first quarter, and the US S&P 500 is down 4.9%. The outlook for equity funding is strong, with more than $1 trillion in US private equity and venture capital dry powder, a near record, looking to find transactions.
The outlook for debt is mixed. High-quality fixed-rate issuers will still be able to access the bond markets, but the fixed-rate high yield bond market is likely to struggle in an increasing rate environment. The floating rate nature of the leveraged loan market makes it an attractive financing tool. A risk on the horizon includes issues around Russian sovereign and company debt arising from the Ukraine conflict.
Commodities have been particularly volatile in the current environment, with record oil prices causing significant ripple effects through the US economy, disruptions in a variety of agricultural commodities, and many other hard assets attracting strong buying activity as a hedge against volatility and supply chain driven inflation.
“Geopolitical concerns, rising interest rates and inflation have resulted in a more cautious and sober tone in both the equity and debt markets. Debt investors, while more selective, should still be able to put capital to work, as acquisition-related issuance is expected to remain strong this year.”
US debt markets raised $634 billion in the first quarter. The first six weeks saw the market humming on all cylinders. But after the Russia-Ukraine conflict began, the HY bond market essentially shut down for an unprecedented two weeks. Five high yield bond deals have already been withdrawn, equal to the total withdrawals in all of 2021. The leveraged loan market continued completing deals, but saw a slow down in new deals going to market in the middle of the quarter. M&A and LBO activities have slowed down significantly in February and March with acquirers hitting pause on new deals due to geopolitical uncertainty. That will likely pick up when volatility subsides.
Please note: IPOs with deal values of less than $25 million, best efforts offerings, oil and gas royalty trusts, business development companies, pricing on OTC Bulletin Board and OTC Pink Sheets are excluded from this narrative. Venture capital fundraising uses the close date of US domiciled funds. Rate hike estimate per S&P Global. Data from SEC filings and third-party databases as of 3/31/22.
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