South Africa’s warning of a
new and fast-spreading strain
of coronavirus walloped the
energy sector on Friday, leading to the sharpest declines in
oil prices since the global
economy locked down early
last year to slow the spread of
the deadly virus.
Oil prices fell more than
11%. Gasoline and diesel futures each dropped more than
12%. Tumbling energy stocks
gave the strongest pull to
plunging stock indexes Friday.
The declines represent new
fears that mobility and economic activity would be limited
this winter by variants and outbreaks of Covid-19.
Friday’s rout also represents
a sharp reversal in the trajectory of transportation-fuel
prices, which had been rising
and taking big bites out of
household budgets. Earlier in
the week the U.S. and other
countries coordinated the release of strategic oil reserves in
an effort to tamp down prices
and ease inflationary pressures
on consumers and businesses.
Prices for crude oil and refined fuels, such as gasoline
and diesel, were little moved
by the prospect of additional
supply hitting the market. But
on Friday new travel restrictions and the potential for an other spell of working from
home and forgone vacations
had traders thinking that demand, not supply, could fall
short this winter.
“Even without severe restrictions, people will adopt
more caution which will weigh
on demand,” said Craig Erlam,
senior market analyst at trading firm Oanda.
Friday’s selloff was reminiscent of Black Friday seven
years ago, when the Organization of the Petroleum Exporting Countries opened its spigots and initiated a price war
ing into 2022. Last month, U.S.
companies sold $29.3 billion
of junk bonds, down from
$43.8 billion in September.
Many companies have raised
sizable cash stockpiles and refinanced debt over the past
two years.
Higher inflation could also
make junk bonds less appealing.
Rising prices erode the purchasing power of bonds’ fixed
payments. They can also drive
the Federal Reserve to raise
rates, reducing the relative appeal of outstanding bonds.
In recent months, the consumer-price index has jumped
above the average yields on
junk bonds. That upends the
conventional logic of investing
in bonds, which are typically
prized for protecting investors’ money.
“It is now about which
companies can manage supply
and pricing pressures and less
so whether they can survive
through the pandemic,” said
Matt Toms, chief investment
officer of fixed income at Voya
Investment Management,
which manages more than
$257 billion in assets.
Junk bonds have returned
4.1% to investors this year
through Monday, counting interest payments and price
Caribbean Group slid 13%.
Airlines didn’t do much better. United Airlines Holdings
Inc. shares dropped 9.6%,
American Airlines Group Inc.
lost 8.8% and Delta Air Lines
Inc. fell 8.3%. Hotel and resort
companies fared poorly. Marriott International Inc. shares
retreated 6.5%, Host Hotels &
Resorts Inc. declined 6.2% and
Wynn Resorts Ltd. dropped 6%.
Vaccine makers, on the
other hand, were an obvious
bet. The top performer in the
S&P 500 was Moderna Inc.,
which jumped 21%. Shares of
Pfizer Inc. rallied, too, rising
6.1% to $54, a record close.
Investors also turned to diagnostic companies, sending
Quest Diagnostics Inc. shares
up 3.6% and Laboratory Corporation of America Holdings
shares up 2%. And they wagered on a rise in demand for
cleaning products, driving Clorox Co. shares up 3.7%.
It was like early 2020 all
over again in the stock market
Friday.
Major indexes sold off, with
the Dow Jones Industrial Average suffering its worst day in
a year, on fears of a fastspreading new variant of the
coronavirus. Investors returned to their early-pandemic
playbooks for which companies could be expected to
struggle or thrive.
Work-from-home stocks rallied. Zoom Video Communications Inc. and Peloton Interactive Inc. both advanced 5.7%,
and Teladoc Health Inc. added
3.4%. All three are still down
significantly for the year.
Of course, more stocks were
hurt than helped by concerns
that economic activity could
once again be constrained by
government restrictions or individual caution.
“Time will tell how worried
we should be, but investors
are selling in front of potential
bad news,” wrote Ryan Detrick, chief market strategist
for LPL Financial.
Among the biggest losers
Friday were travel stocks.
Cruise companies sold off.
Norwegian Cruise Line Holdings Ltd. and Carnival Corp.
each slumped 11%, and Royal
BY KAREN LANGLEY
Early-Covid Investing Plays Are Back
Royal Caribbean shares declined 13% as investors sold travel stocks, from cruise companies to hotel and airline stocks.
SEBASTIEN SALOM-GOMIS/AGENCE FRANCE-PRESSE/GETTY IMAGES
changes, according to LCD.
That falls short of the 4.5% total return on leveraged loans,
which have interest rates that
rise and fall with their benchmark, but beats the minus
1.73% return on investmentgrade corporate bonds and minus 2.93% for Treasurys.
Analysts and investors expect junk-bond defaults to remain low next year, supporting
bond prices. Bank of America
analysts are forecasting next
year’s junk-bond default rate to
finish at 1.7% and for a record
number of bonds to rise to investment-grade. They expect
returns on junk bonds tied to
gambling and real-estate companies to be the market’s top
performers next year.
The strong economic backdrop has motivated Lyniese
Patterson, high-yield portfolio
manager at Income Research +
Management, to shift some of
her holdings into lower-rated
debt, from double-B to single-B.
She favors bonds tied to companies that make goods such as
machinery, tools and equipment and that can pass on rising costs to customers, as well
as communications companies
that are more removed from inflation pressures.
“We’re finding attractive
opportunities worth investing
in,” she said. “Inflation is not
as bad as feared for some
credits, given they have various levers to pull.”
Investors’ hunt for higher
fixed-income returns has powered sales of low-rated corporate bonds to a record.
U.S. companies, including
medical supplier Medline Industries LP and videogame
maker Roblox Corp., have sold
more than $455 billion of
bonds with speculative-grade
credit ratings this year through
Monday, according to S&P
Global Market Intelligence’s
LCD. That already beats the
full-year total for 2020, when
junk-bond sales set a then-record of $435 billion.
This year’s bond sales mark
a notable reversal from the
spring of 2020, when investors’
worries about widespread
bankruptcies and defaults
sparked a selloff in low-rated
debt. Since then, ultralow interest rates and a stimulus-fueled
economic rebound have supported companies with weaker
credit ratings and boosted the
appeal of riskier debt.
Junk bonds and so-called
leveraged loans are typically
issued by companies with significant debt relative to their
earnings, or leverage, making
them more sensitive to the
economy’s trajectory. Economists surveyed by The Wall
Street Journal are forecasting
5.22% U.S. economic growth
by the end of this year and
3.59% in 2022.
BY SEBASTIAN PELLEJERO
High-Yield Bond Sales Climb to Record
Sales of U.S. junk bonds, yearly
Note: 2021 data is as of Nov. 22.
Source: S&P Global Market Intelligence's LCD
$500
0
100
200
300
400
billion
2005 ’10 ’15 ’20
Roblox is among this year’s issuers of speculative-grade bonds.
BRENDAN MCDERMID/REUTERS
from which U.S. shale drillers
have yet to fully recover.
Shares of refiners, rig owners, pipeline operators and oil
producers all tumbled Friday.
Energy was the S&P 500’s
worst-performing sector.
In London, BP PLC and
Royal Dutch Shell PLC lost
7.9% and 5.7%, respectively. In
New York, Halliburton Co. fell
6.8% and 3.5% was knocked
off of Exxon Mobil Corp.
Smaller U.S. shale drillers
were particularly hard hit,
with shares of Callon Petroleum Co., Laredo Petroleum
Inc. and Centennial Resources
Development Inc. each shedding more than 13%.
U.S. crude futures ended
13.1% lower at $68.15 a barrel,
while Brent crude, the international benchmark, dropped
11.6% to $72.72. The reversal
in prices, which haven’t been
so low since early September,
has traders and analysts recalibrating expectations for next
week’s meeting in Vienna of
the oil-exporters cartel and its
market allies, including Russia,
known as OPEC+.
Some believe that between
the release of government reserves, Friday’s price collapse
and concerns that the pandemic isn’t as close to ending
as believed, the group may
dial back plans to pump more
crude into the market.