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As for the economy, we see it as a pack of animals where the predators are becoming more aggressive and killing off the vulnerable. The US economy remains robust, as indicated by its historically low unemployment rate. However, we observe stress at the margins through the behavior of low-income consumers, subprime auto loan delinquencies, and high-yield bond defaults.
To add to this trend, US bankruptcy filings continued to rise for the sixth consecutive month in May, affecting companies with more than $10mn in assets or liabilities. Defaults on High-yield bonds and leveraged loans are on the rise, with the latter increasing faster, indicating what bond defaults may look like if rates do not decrease.
Furthermore, commercial mortgage-backed securities that are interest-only and coming due over the next three years will make it challenging for property owners to refinance their debt, particularly if current interest rates remain unaltered.
Liquidity flows tend to correspond with the relative performance of growth stocks, with added liquidity pushing investors out on the risk spectrum, where expensive growth stocks are. We analyzed Strategas’s liquidity indicator by plotting it against the relative performance of the Russell growth index against its value counterpart, and the data showed a correlation. However, we noted that this theory can be complex, and we need to consider where it could break down.
Finally, we discussed the hedge funds and other speculative investors who are betting on the S&P 500 declining. While higher hedging activity may imply bad sentiment, it could also be a bullish sign as not everyone has sold their stocks yet.
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