• 2 hours The Shroom Boom Is Here To Stay
  • 1 day Biden Will Be A Boon For Solar Stocks
  • 3 days The Gold Rally Has Finally Run Out Of Steam
  • 3 days Citibank Analyst Predicts $300k Bitcoin By End Of 2021
  • 6 days Bitcoin Lives Up To Its Safe Haven Status In A Big Way
  • 6 days 14 Million People Will Lose Unemployment Benefits On December 31st
  • 8 days Why 12 Million American Millionaires Isn’t Good News
  • 9 days Big Oil Is Paying The Price For Investing In Renewables
  • 10 days The Banking Industry’s $35 Billion Gravy Train Could Disappear
  • 11 days Did Amazon Just Democratize Prescription Drugs?
  • 12 days The Private Space Race Just Got Very Real
  • 14 days Short Sellers Are Willing Big In This Turbulent Market
  • 15 days SpaceX Gets Go-Ahead To Send Humans Into Space
  • 16 days Saudi Arabia Lost $27 Billion In Oil Crash
  • 17 days China’s Big Tech Takes A Hit As Regulators Crack Down
  • 18 days Black Friday Could Be Retailers’ Only Hope
  • 19 days Why You Should Not Dump Your Stay At Home Stocks Just Yet
  • 20 days The Real Reason Why Uber And Lyft Stocks Have Soared Nearly 50%
  • 22 days Bitcoin Heads Towards $16,000 And No One’s Cashing In
  • 23 days Elon Musk’s $250 Tesla Tequila Is Already Sold Out
What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

  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