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  • While headline default rates have ticked up in the last two years, they are primarily driven by distressed exchanges, see the first chart. The increase in dollar-weighted default rates has been less severe—those have, in fact, been trending lower recently—suggesting that a disproportionate number of small companies are facing stress, see the second chart.

    The implication is that even as default rates have ticked up, credit losses suffered by high-yield and leveraged-loan investors remain pretty muted. However, with interest rates staying higher for longer, the increase in distressed exchanges could pressure future recoveries if the underlying issuer fundamentals remain stressed.

    For more discussion, see our 2025 credit outlook here.

    Leveraged loans: Distressed exchanges putting upward pressure on default rates
    Source: Shobhit Gupta, PitchBook LCD, Apollo Chief Economist
    Big difference between issuer-weighted and dollar-weighted default rates
    Source: Shobhit Gupta, Moody’s Analytics, Apollo Chief Economist

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  • The chart below shows that when interest rates are low, more unicorns are created because it is cheaper for startups to access capital, allowing them to scale faster and reach a billion-dollar valuation.

    When interest rates are higher for longer, fewer unicorns are created because financing costs are more expensive, and it becomes more difficult for companies to expand.

    This is not surprising. In fact, this is the entire idea from the Fed with raising interest rates: to make borrowing more expensive and slow economic activity.

    The bottom line is that venture capital is unattractive in a higher-for-longer environment because startup firms are characterized by having no earnings, no revenues, and no cash flows, and, therefore, less ability to pay the debt-servicing costs that are associated with expanding the business.

    In short, companies with low interest coverage ratios struggle when interest rates are higher for longer.

    Venture capital is unattractive in a higher-for-longer rate environment
    Source: Ilya Strebulaev, Venture Capital Initiative, Stanford Graduate School of Business, Apollo Chief Economist

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  • The US Economy Is Strong

    Torsten Sløk

    Apollo Chief Economist

    On Monday, we will get manufacturing ISM for January, and it is likely to show a big jump higher, see charts below. Based on the historical relationship with the regional Fed ISM indicators, the nationwide ISM could increase to 54, a level which would be consistent with first-quarter GDP growth of 3.4%.

    The strong momentum in the economy is driven by high stock prices, high home prices, and strong tailwinds to growth from tech capex spending, defense spending, and spending driven by the CHIPS Act, the IRA, and the Infrastructure Act.

    Combined with low jobless claims and higher animal spirits since the election, the bottom line is that the US economy is entering 2025 with accelerating momentum.

    The narrative that the economy is slowing and inflation is moving down to 2% is wrong, see again charts below.

    Regional Fed manufacturing surveys point to rebound in nationwide manufacturing ISM
    Note: Fed Manufacturing tracker is the average of the FRBNY, Federal Reserve Bank of Richmond, Federal Reserve Bank of Philadelphia, Kansas City Fed, Federal Reserve Bank of Dallas manufacturing surveys. Source: ISM, FRBNY, Federal Reserve Bank of Richmond, Federal Reserve Bank of Philadelphia, Kansas City Fed, Federal Reserve Bank of Dallas
    South Korea exports also point toward rebound in manufacturing activity
    Source: BoK, ISM, Haver Analytics, Apollo Chief Economist
    S&P 500 forward EPS points to higher manufacturing ISM
    Source: ISM, Bloomberg, Apollo Chief Economist

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  • In France, government pension spending is 14% of GDP. In Germany, it is 10%, and in the United States, it is 7%, see chart below.

    There is a need for more retirement savings in all OECD countries.

    Total public pension spending as % of GDP, by country
    Note: Data for 2019. Source: OECD, Apollo Chief Economist

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  • This Is Not a Correction

    Torsten Sløk

    Apollo Chief Economist

    The DeepSeek correction in tech stocks has not changed the overall concentration problem in the S&P 500, see chart below. Investors in the S&P 500 continue to be dramatically over-exposed to the tech sector. 

    S&P 500 share of top 10 companies still high
    Source: Bloomberg, Apollo Chief Economist

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  • The Evolution of Asset Allocation

    Torsten Sløk

    Apollo Chief Economist

    Asset allocation has evolved from the 60/40 portfolio to the barbell portfolio to now focusing on fixed income replacement and equity replacement, see chart below.

    The evolution of asset allocation
    Source: Apollo Chief Economist

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  • Upside Risks to Inflation

    Torsten Sløk

    Apollo Chief Economist

    The share of companies planning to raise prices remains elevated and has started to trend higher, see the first chart below.

    Combined with the recent jump in ISM services prices paid, see the second chart, this points to upside risks to inflation going forward.

    Upside risks to inflation
    Source: NFIB, Haver Analytics, Apollo Chief Economist
    ISM Services Price Paid index is a leading indicator for PCE
    Source: BEA, ISM, Haver Analytics, Apollo Chief Economist

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  • Trends in US Immigration

    Torsten Sløk

    Apollo Chief Economist

    We created a chart book looking at recent trends in US immigration. It is available here, with key charts inserted below.

    US: 23% of the foreign-born population is unauthorized
    Source: Pew Research Center, 2022, Apollo Chief Economist
    Estimated unauthorized immigrant population, by country of birth
    Note: Pew Research Center estimates based on augmented US Census Bureau data – American Community Survey, 2005-2022 (IPUMS); Current Population Survey, 1995-2004; Decennial Census 1990 from Warren and Warren (2013). Source: Pew Research Center, Apollo Chief Economist

    Share of population that is unauthorized, by state
    Note: Pew Research Center estimates based on augmented US Census Bureau data – American Community Survey, 2005-2022 (IPUMS); Current Population Survey, 1995-2004; Decennial Census 1990 from Warren and Warren (2013). Source: Pew Research Center, Apollo Chief Economist
    Processing times for applications for US citizenship have declined from 12 months to 4 months
    Note: Year indicates Fiscal Year. Source: US Citizenship and Immigration Services, Apollo Chief Economist
    Working age immigrant population is up 6 million since the pandemic
    Source: BLS, Haver Analytics, Apollo Chief Economist
    Only 23 states use E-Verify
    Note: E-Verify is a voluntary internet-based program to help employers verify the work authorization of all new hires. The program is administered by the US Department of Homeland Security in partnership with the Social Security Administration. Currently, 23 states require the use of E-Verify for at least some public and/or private employers. Source: NCSL, Apollo Chief Economist
    Net migration is a key driver of labor force growth
    Source: BLS, Haver Analytics, Apollo Chief Economist
    Trends in US immigration

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  • Interest Rates Higher for Longer Continues

    Torsten Sløk

    Apollo Chief Economist

    The incoming data shows that weekly same-store retail sales are strong, daily debit card spending data is strong, daily TSA air travel data is strong, the JOLTS layoff rate is very low, WARN notices are low, jobless claims are low, and announced job cuts are very low.  

    Combined with the latest Atlanta Fed GDP estimate at 3.0% and a boost coming to growth and inflation because of the Fed cutting interest rates since September and higher animal spirits since the election, the bottom line is that the US economy is entering 2025 with some really strong tailwinds, and the market is underestimating the risk that the Fed will have to hike interest rates later this year.

    Our chart book with daily and weekly indicators for the US economy is available here.

    Announced job cuts remain low
    Source: Challenger, Gray & Christmas, Haver Analytics, Apollo Chief Economist
    WARN data points to steady claims in coming months
    Note: The Worker Adjustment and Retraining Notification (WARN) Act helps ensure 60 to 90 days advance notice in cases of qualified plant closings and mass layoffs. WARN factor is the Cleveland Fed estimate for WARN notices. Source: Department of Labor, Haver Analytics, Federal Reserve Bank of Cleveland, Apollo Chief Economist
    Very low levels of layoffs
    Source: BLS, Haver Analytics, Apollo Chief Economist

    Daily data for US air travel
    Source: TSA, Bloomberg, Apollo Chief Economist
    Daily data for debit card transactions
    Note: Consists largely of debit card transactions. Source: Bloomberg, Apollo Chief Economist
    Weekly data for same-store retail sales
    Source: Redbook, Haver Analytics, Apollo Chief Economist
    Weekly initial jobless claims
    Note: Some data not shown in chart due to significant variances in scale. Source: US Department of Labor, Apollo Chief Economist
    Weekly continuing jobless claims
    Note: Some data not shown in chart due to significant variances in scale. Source: US Department of Labor, Apollo Chief Economist
    2024 Q4 GDP estimate from Atlanta Fed: 3.0%
    Source: Federal Reserve Bank of Atlanta, Haver Analytics Apollo Chief Economist
    Impact on GDP of Fed cuts and changes in financial conditions since the Fed started cutting interest rates in September 2024
    Note: The following shocks are applied to Q4 2024: A 0.2%-point rise in inflation expectations, 7% appreciation in the exchange rate, 0.5 standard deviation fall in VIX, 30 bps tightening of credit spreads, -100 bps rate cuts and -50 bps forward guidance. Source: Bloomberg SHOK model, Apollo Chief Economist
    Impact on inflation of Fed cuts and changes in financial conditions since the Fed started cutting interest rates in September 2024
    Note: The following shocks are applied to Q4 2024: A 0.2%-point rise in inflation expectations, 7% appreciation in the exchange rate, 0.5 standard deviation fall in VIX, 30 bps tightening of credit spreads, -100 bps rate cuts and -50 bps forward guidance. Source: Bloomberg SHOK model, Apollo Chief Economist

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  • Inflation Expectations by Political Party

    Torsten Sløk

    Apollo Chief Economist

    Household inflation expectations have shifted completely after the election, see the chart below.

    Inflation expectations, by political party
    Source: University of Michigan, Bloomberg, Apollo Chief Economist

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