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The global credit cycle appears to be rolling into recovery after swift progress through the downturn and credit repair phases. Here, we share our analysis of the credit cycle and key factors we’re watching.


We use the table below to track important indicators of the credit cycle. The majority of signals are now consistent with the recovery phase of the credit cycle, especially when incorporating our forward-looking views.



The table above tracks the most significant indicators of the credit cycle. However, we’re also watching factors specific to current circumstances that might influence progress through the cycle. In our view, no individual variable is likely to single-handedly shift the cycle, but it may ignite a chain of developments that ultimately rotates the cycle. Here’s a snapshot of these special factors:

Macro Credit Cycle Graphic - 10.2.2020-1Macro-Credit-Cycle-Chart_11.19.2020Macro Credit Cycle Graphic - 10.2.2020



Here are common themes typical of recovery:

  • Profits typically grow faster than debt, and defaults usually peak.
  • Corporate deleveraging should be well underway, especially as asset prices rebound.
  • Credit spreads tend to move tighter and equities start to outperform.
  • Risk appetite continues to improve as economic and profit growth become stronger.
  • Lending standards ease, and credit supply improves.
  • Asset prices typically get bid up with liquidity generated from increased credit and profit growth.

Importantly, we do not expect a smooth path through recovery. Surging COVID-19 cases worldwide and dwindling fiscal support will likely moderate the pace of growth in the months ahead. However, with a vaccine on the horizon and a US fiscal package anticipated in early 2021, we believe markets will look through short-term disruptions.

Several economic indicators support our positive view of the recovery:

  • The aggregate health of the US consumer appears strong, with $1.25 trillion of excess savings compared to pre-pandemic levels.1
  • We have a solid outlook for the housing market, which has made a striking recovery from the lows reached in the spring of 2020. Strong demand and historically low mortgage rates have led to a significant resurgence of order growth for new homes, existing homes and continued home price appreciation.
  • We expect many goods providers to begin rebuilding inventory levels.
  • Even the small business sector appears to be holding up, thanks in large part to the fiscal support it has received thus far. Small business confidence and hiring intentions have sharply recovered from spring 2020 lows.2

Together, we believe these factors could create a powerful engine for the recovery when we exit pandemic conditions. If social distancing begins to lift in late spring 2021, we believe global GDP could reach its 4Q 2019 peak sometime in late 2021 or early 2022.




OUR VIEW: Positive vaccine news should keep us on track to begin easing social distancing by summer 2021.

THE DETAILS: COVID-19 cases in Europe and the US are on the rise, which could slow the recovery. However, we think testing, tracing, and containment measures will help prevent severe lockdowns. We expect large-scale vaccine distribution to begin in early 2021, and social distancing measures could begin to ease by summer 2021.

Global Growth

OUR VIEW: We believe global growth will moderate in Q4 2020 as COVID-19 cases surge in major countries. However, we expect the pace of growth to accelerate in 2021.

THE DETAILS: The recovery in global growth may be tempered in the near term as major economies try to contain the spread of COVID-19. However, an additional US fiscal package, monetary policy support and pent-up demand could feed a strong recovery once vaccine distribution begins.

Fiscal Policy

OUR VIEW: Effective fiscal delivery is critical for the recovery. Despite delays, we believe the US will ultimately deliver what’s needed by Q1 2021.

THE DETAILS: Extreme partisanship in the US government may limit, or prevent, any fiscal action in Q4 2020. We think a fiscal package is more likely to pass in Q1 2021. If Republicans keep control of the Senate, it could be in the range of $1.5 trillion.

US Corporate Profits

OUR VIEW: We expect profit growth to potentially exceed 20% in 2021.

THE DETAILS: Corporate profits continued to beat consensus expectations in Q3 2020, though expectations were admittedly low. We believe profit growth is on track to reach its 2019 peak in 2021.

US Corporate Leverage

OUR VIEW: We expect companies to pursue genuine deleveraging, where profit growth exceeds debt growth and the debt-to-profits ratio declines.

THE DETAILS: We are not yet seeing companies actively deleverage. Profits are just starting to bounce back, but it is early days. Once profits and incomes sustain a rebound, we expect to see more deleveraging efforts. Companies will typically shift their focus from financial engineering to fixing their balance sheets. Of course, the defaults we’ve seen are another form of deleveraging, but it is much healthier to lower the debt-to-profits ratio.

Global Credit Risk Premium/Risk Appetite

OUR VIEW: Credit spreads have retraced much of the March selloff, but we see room for additional tightening over the next six months.

THE DETAILS: Credit spreads appear well supported as profits continue to bounce back and monetary policy remains easy. Markets appear to be looking forward to a successful vaccine and an end to social distancing by mid-2021. Any significant delay in a vaccine would be a major headwind for the markets.

Global Inflation

OUR VIEW: In October, inflation in most major economies was below 1.5% on a year-over-year basis.

THE DETAILS: Global inflation remains very low. In October, inflation in most major economies was below 1.5% on a year-over-year basis. We see limited inflation pressure in the near term and we expect central banks to remain accommodative.

The Dollar

OUR VIEW: The US dollar appears more likely to depreciate as long as risk appetite stays well supported.

THE DETAILS: The dollar has been trading in a range for a few months now. We believe the dollar will eventually break out of that range and grind weaker as investors feel more comfortable taking risk and shifting their portfolios abroad.


1Source: Bureau of Economic Analysis NIPA Tables, Q3 2020.

2Source: National Federation of Independent Business.
Views as of November 20, 2020. The chart presented above is shown for illustrative purposes only. Some or all of the information on this chart may be dated, and, therefore, should not be the basis to purchase or sell any securities. The information is not intended to represent any actual portfolio.

This material is provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein, reflect the subjective judgments and assumptions of the authors only, and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. Investment recommendations may be inconsistent with these opinions. There is no assurance that developments will transpire as forecasted and actual results will be different. Data and analysis does not represent the actual, or expected future performance of any investment product. Information, including that obtained from outside sources, is believed to be correct, but Loomis cannot guarantee its accuracy. This information is subject to change at any time without notice.

Indices are unmanaged and do not incur fees. It is not possible to invest directly in an index.

Past market experience is no guarantee of future results.

LS Loomis | Sayles is a trademark of Loomis, Sayles & Company, L.P. registered in the US Patent and Trademark Office.


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