• 6 hours Equities Cheer Stellar Jobs Report, But It May Be Fleeting
  • 1 day Is Tech Billionaire Peter Thiel Done With Trump?
  • 2 days Musk Takes To Twitter To Troll The SEC
  • 3 days Lunar Mining May Commence As Early As 2025
  • 3 days Immigration Will Go Bust Without $1.2B Bailout
  • 4 days The Economics Of The Space Race
  • 5 days Why The World's Central Banks Aren't Yet Sold On Renewables
  • 5 days How Much More Cash Can Uber Burn?
  • 6 days Inside The Biggest Counterfeit Gold Scandal In Recent History
  • 6 days EU-U.S. Trade Relations Are Deteriorating
  • 6 days Over 184 Companies Have Bailed On Facebook
  • 6 days BP Sells Petrochemical Business For $5 Billion
  • 7 days U.S. Moves To Secure Domestic Rare Earth Supply
  • 7 days E-Commerce Explodes As Boomers Go Digital
  • 8 days Major U.S. Cities Are Turning To Renewables
  • 8 days Economic Reopening Backfires, COVID Surge Snaps Recovery
  • 9 days How Are Low Car Sales Impacting The Metals Market?
  • 9 days Are Gold Stocks Still Undervalued?
  • 10 days Singapore's $3 Billion Oil Trading Scandal
  • 10 days Luxury Clothing Isn’t A Priority As Americans Grapple With COVID-19
Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

The Problem With Modern Monetary Theory

The Problem With Modern Monetary Theory

Modern monetary theory has been…

Another Retail Giant Bites The Dust

Another Retail Giant Bites The Dust

Forever 21 filed for Chapter…

  1. Home
  2. Markets
  3. Other

Are Junk Bonds Saying Economic Trouble Lies Ahead?

What Are Riskier Segments Of The Market Telling Us?

The major U.S. market indexes got off to their worst start in history this year, which is a very strong statement. Are other areas of the market waving red flags as well? From Bloomberg:

The junk-bond market is indicating a 44 percent chance of a recession in the U.S. within one year, according to Martin Fridson, a money manager at Lehmann, Livian, Fridson Advisors LLC. "I am not an economic forecaster -- this is what the market is saying," said Fridson, who started his career as a corporate-debt trader in 1976. "There are lots and lots of caveats, but if you accept all of the assumptions, it's a pretty startling comment."


Small Caps Lean Risk-Off

All things being equal, investors tend to migrate to smaller growth companies when they feel good about future economic outcomes. Conversely, they tend to migrate away from small caps (IWM) when deflationary or recessionary concerns are gathering steam. Small caps are in a clearly defined bearish weekly trend (see 2016 chart below).

Russell 2000 Weekly Chart


Credit Markets Look Concerned

Another way of keeping tabs on the market's tolerance for risk is to compare the performance of riskier "junk" bonds to more conservative long-term Treasuries. When the ratio below is rising, it tends to be bullish for stocks since it reflects confidence that junk bond holders will receive their principal and interest payments in a timely manner. Currently, the ratio is in a clearly defined bearish weekly trend. If you prefer to compare JNK to IEF, that ratio paints the same concerning picture.

Junk Bonds versus Treasuries


Investment Implications - The Weight of The Evidence

As outlined in detail on February 19, numerous forms of hard evidence remain in a risk-off posture, especially on a longer-term time horizon (weeks, months, years). Countertrend moves and green days are common in the context of bearish trends. Therefore, while we are always open to improvement, the recent gains in stocks have had little impact on the longer-term data tracked by our market model.

 

Back to homepage

Leave a comment

Leave a comment