Displaying items by tag: recession
One of the biggest ratings agencies on Wall Street has just put out a stern warning on the junk bond market. Moody’s says that high yield debt may fall “significantly” after a big rally this year. In a quote that captures the general disbelief that has accompanied the junk bond rally this year, Moody’s economist John Lonski says ““High-yield bonds have rallied mightily despite the lack of any observable broad-based acceleration of either business sales or corporate earnings”. Moody’s thinks that if performance of the underlying companies in the space does not improve, then there will be a reckoning, saying ““If the anticipated improvement in the fundamentals governing corporate credit quality do not materialise, a significant widening of high-yield bond spreads is likely”.
FINSUM: Irrational exuberance?
If one thing is for sure about markets at the moment, it is that investors are less worried about the economy and less stressed about the chances of a bear market. That is exactly why the market is at risk. The market’s fear index, the VIX, jumped a whopping 16% yesterday, signaling some underlying anxiety building after a calm and positive stretch. One of the factors that is looming over markets is whether the tariff deadlines on China get delayed or not, which will be a sign of progress or failure on the trade deal. Further, fears over the election, and higher rates, are likely to dampen corporate spending and slow the economy.
FINSUM: Our worry is that the anxiety level at the moment does not seem to be matching the real risk, which ironically is when the chance of a market downturn is at its highest.
One asset manager called last year’s fourth quarter stock rout perfectly, and they are doubling down, saying it will happen again this year. Principal Global Investors’ Seema Shah says that stocks are facing another imminent selloff if the US and China can’t get a trade deal done before the December 15th tariff deadline. “If that trade deal doesn’t happen and if everything falls apart and it feels like tensions are getting worse, then I think we are facing a potential repeat of last year, and it will be worse”, said Shah. She says that the shock could be even bigger than in other parts of the year because of how liquidity disappears in December.
FINSUM: So we are dubious on this call, but what is interesting to us is that this argument was published on November 28th, and since then Trump has backtracked on the trade deal timeline.
Deutsche Bank has just gone on the record with a bold prognostication. The bank says that the global economy is “bottoming out”. While that may sound grave without further context, what Deutsche actually means is that the global economy has already seen the worst of the current downturn. The bank expects that the world’s economy will be improving next year, meaning we may have finally turned the corner on slowdown fears. “Key to our optimism is that the risks of trade wars and Brexit are evolving in positive ways, and the possibility of a radical policy shift to the far left in the U.S. and the U.K. after their respective elections seems remote”, says Deutsche Bank’s research team.
FINSUM: So did we just go through a “recession” and now the economy and market are ready to turn the jets back on? Quite optimistic (especially after a 25% gain in the S&P this year), but not altogether unlikely.
If there was ever a stock market indicator that makes us worry, it is when the general public gets very bullish. Nothing seems to yell “stock market peak” like a record setting sentiment number. A new sentiment tracker from Qontigo called ROOF (risk-on/risk-off) just registered a score of 4.8, which is in the 95th percentile historically. The ROOF score hit a low on October 2nd and has been rising since then.
FINSUM: Whenever we see readings like this it just always feels as though a correction is near. The reason why is that since people’s expectations are high, they are easily let down and get fearful/redemptive.