Daily Commentary

MarketMinder’s View: This piece mentions several companies and funds, so please note MarketMinder doesn’t make individual security recommendations. Rather, our interest here is in a broader theme: No asset class is inherently superior to another, as some investors in private-credit funds (including the business development companies, or BDCs, highlighted here) are finding out. “BDCs typically make high-interest loans to midsize corporations with junk credit ratings, using the interest income from those loans to pay dividends. A handful of these funds have cut dividends because the yields on their loans are falling in lockstep with benchmark interest rates. More dividend reductions will follow, [BDC analyst Robert] Dodd said, likely prompting more redemptions.” As the analyst also mentioned, some individual investors are surprised when their dividends fall, prompting them to sell—a similar emotional reaction that afflicts stock owners during bouts of negative market volatility. Besides reduced dividends, the article points out another major issue worth being aware of with private-credit funds: a lack of liquidity. “Unlike insurers and pensions, which match investments to long-term liabilities that won’t come due for years, individuals often sell holdings to pay for major life expenses. Investing in funds built for deep-pocketed institutions may complicate these short-term needs, like paying for a medical procedure or college tuition.” Some firms have tried to address this with a “semi-liquid” option that limits quarterly redemptions to a certain percentage of outstanding shares, but those limits can be vexing if everyone is trying to get their money out at the same time. For investors, always read the fine print—don’t let shiny returns distract you from important details (like redemption rules), and always remember illiquid doesn’t mean stable. It just means fewer pricing points, which obscures the inherent volatility and can be a major pain point later. For more, see our past commentary, “The ABCs of BDCs: A Primer on Business Development Companies.”

MarketMinder’s View: Given the discussion of tax policy here is quite politicized, we remind you MarketMinder prefers no politician nor any party—our focus is on a policy’s economic and market implications only. When it comes to taxes, your friendly MarketMinder Editorial Staff are probably similar to you: We prefer to pay less so we have more money to spend on things we want and need (e.g., some sweet hand-knit sweaters and small-batch jeans). But from a macroeconomic perspective, higher tax receipts help governments service their debt. So it is with the UK: “Figures from the Office for National Statistics (ONS) show that the UK borrowing fell to £11.6bn in December, a fall of £7.1bn from a year earlier and below analysts’ expectations. The better-than-expected borrowing figures emerged after public finances were bolstered by a 7.6pc jump in tax receipts, fuelled by the Chancellor’s decision to increase levies on both businesses and workers. The ONS said Ms Reeves’s National Insurance hit on employers helped boost the tax take by £23.8bn from April to December compared with a year earlier, bringing in just shy of £150bn in total.” Again, we aren’t cheering higher taxes, but this is one way governments ensure borrowing obligations don’t overwhelm public finances. As the rest of the article frets over slow deficit reduction, the size of the public debt and political uncertainty over the current Labour government, these borrowing and tax receipt data indicate the UK actually isn’t in dire straits—reality is better than many realize. And if these better-than-expected fiscal results prevent more “austerity” fears around future Budgets, so much the better for sentiment.

MarketMinder’s View: The fear discussed here: US households are using more of their incomes to finance spending and the savings rate is falling. The upshot: “This can’t go on much longer; consumers will eventually pull back on their spending, probably sooner rather than later. This is no small matter for the economy, given that consumption accounts for two-thirds of gross domestic product.” If you look at the charts shared within, they do look worrisome—but as they go back only to June 2023, they don’t provide a complete picture. For instance, yes, savings as a percentage of disposable income is low relative to the past two and a half years. But according to the St. Louis Federal Reserve, this ratio is right around levels from the mid-2010s and above the mid-2000s. So, not exactly a screaming warning sign to us, and that is setting aside the many flaws with the calculation itself (chiefly, that it omits retirement savings). The back half of the article frets over waning US consumer sentiment and warns persistent headwinds, including sticky inflation and high interest rates, will stretch household finances. To us, these lingering concerns are evidence that while US sentiment overall has warmed up, it remains pre-euphoric—skepticism hasn’t gone away completely.