Caution signs

Question: What headwinds may the high-yield market face in 2024?

Mark Durbiano: We think the overall economy in 2024 is going to be a little weaker, probably a little weaker than the consensus thinks. As we move into 2024, that period where the long and variable lags associated with Federal Reserve policy we think is just entering the zone where it's really going to have an impact on the overall economy. So we look for a softening economy as we go into 2024. There are a lot of indicators out there which are flashing kind of a caution sign. Things like the senior loan manager surveys, leading indicators, the purchasing manager indexes are all sort of flashing caution signs. So we're a little cautious on the overall economy. We think earnings will weaken into 2024. Also, from a micro standpoint, from a high-yield company issuer standpoint, we think earnings are going to come under some pressure here. In 2023, companies have pretty much lived and drove earnings by raising their overall prices. And in many times that was in light of falling volumes. And the equation of raising your prices as your volumes are falling is not a good mix for an overall earnings picture. And we think companies as they move into 2024 are not going to have quite the same ability to raise prices and they're going to have to lower prices and also suffer from some falling volumes. From a high-yield company perspective, also, interest rates are going to be a negative for high-yield issuers. High-yield issuers predominantly have fixed and some floating rate debt, and the cost of that floating rate debt has gone up pretty dramatically in 2023 and that will carry over into 2024.