The sell-off in risk assets last year points to why some wag on Wall Street decades ago coined the adage that bull markets take the escalator up and bear markets take the freight elevator down. The sell-off in the fourth quarter was intense but not atypical. The unanswerable question then and today is whether the sell-off reflected the market discounting weaker earnings to come; illiquidity because heavy selling over the holidays was accentuated by the inability of large banks to commit capital via prop taking versus agency-based market making; or both fundamentals and liquidity.
The rebound in 2019 has been swifter than might be expected normally, but the rally in risk assets accelerated mid-quarter on the 180 degree pivot by Fed officials that further hikes to the Fed Funds target rate (and therefore 30/90-day LIBOR) are on hold until further notice.
While the sell-off was brutal, it was not long enough to materially clip private equity values because public market pricing is but one of several methods used to value privately held assets (M&A data and DCF are among the most common). As for credit, high yield has rallied sharply, too, after fears of the Fed hiking the economy into a recession eased. Plus, the global reach for yield is a long-running theme in the years since the GFC.
In short, 1Q19 was not a game changer for private equity and credit as seemed possible in December. Nonetheless, valuations may be subject to more scrutiny given a slowing economy and subdued M&A environment while a robust IPO calendar will allow public investors to have a say on how well (or not) private markets valued a number of high profile companies such as Lyft and Uber Technologies.
