Inescapable: We’re going to assume the ups and downs of the major indices – and the corresponding movement in BDC common stock prices – will continue until it doesn’t. Since late August, the turmoil across all asset classes has caused the playbook of BDC fundamentals to be thrown out the window as new low after new low is reached, with a few head fakes along the way. As we write this the Dow Jones index is trading 200 points down in the Monday pre-market, which only means that more of the same is on the cards. Admittedly, this past week, the BDC sector fared less poorly than the 3 major indices (Dow Jones, NASDAQ and S&P 500), but that could reverse itself this week, whether the broader markets go up or down. All we are sure of is that the BDC sector cannot disentangle itself from whatever direction the markets are headed. Here is the chart showing the price of the UBS Exchange Traded Note with the ticker BDCS – which includes most every BDC player – since August 30, 2018, roughly when the market dramas began, compared to the main indices.
Back In Sync: As we expected, in the week ended November 30, 2018 the BDC common stock and the broader indices adjusted to get more in sync. The major markets raced ahead, while the BDC sector – which had performed better the week before – followed behind, up 0.62% in price terms. As this 2018 year-to-date chart comparing BDCS to the Dow Jones, NASDAQ and the S&P 500 shows all four have followed a similar shape even if there are short term divergences. If you adjust for the fact that the BDC sector pays out much higher distributions, even the total return is highly similar.
Market Mayhem: As we discussed at length already in our premium BDC Common Stocks Market Recap, last week was surprising as the BDC sector – and many individual BDCs – fared much better than the main indices and all the main categories from investment grade to “junk”. However, we’d be very surprised if the BDC sector can continue to remain uncorrelated with the broader markets for very much longer. As this chart below shows – comparing the price progress of the Exchange Traded Fund SPY, which is based on the S&P 500, and the exchange traded note with the ticker BDCS,which reflect the BDC sector – the two have moved pretty much in tandem since the decline began in the markets on September 20.
Whence The BDC Rally ? : Last week, the two week long BDC rally ground to a halt. Based on the Wells Fargo BDC Index for the period, the sector pulled back (2.2%). Only 9 individual BDC companies were up in price or flat, while 37 were down. Using the UBS Exchange Traded Note which invests in most every common stock in the sector – ticker BDCS – we dropped to (6.6%) down in price terms on a year-to date basis.
It’s hard to imagine a huge turnaround coming this week, what with the broad markets all in various stages of disarray. In addition, the general leveraged loan market – a kissing cousin of the BDC sector – is just coming off its lowest price point in two years, and knocking their total return to below 4%. (The Wells Fargo Index measured comparable return for BDCs is a very close 2.8%). Then there’s the Thanksgiving break coming up with many investors more focused on turkey and family. We expect a non-eventful to lower shade on BDC prices.
BDC Common Stocks
Two Weeks Forward. One Week Back
The BDC common stock winter “rally” took some time off this week, after two weeks of upward momentum.
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