CAMS Weekly View from the Corner – Week ending 10/4/2019
October 7, 2019
The proverbial stopped clock is known for its perfect accuracy. Without question, twice a day it is dead right, outside of that its accuracy is quite unreliable.
The recession obsession that we have questioned in these Weekly Views over the previous year-plus is similar to the stopped clock dilemma. It will be accurate at some point just not with the certainty that one may expect from a typical clock.
This comes to mind in observing the on-going recession obsession. It has been offered, with assured certainty by many over the previous 16 months or so that recession is right in front of us and to prepare accordingly.
The problem: It has not arrived over a year later down the timeline.
With this fact though, we continue to hear, with equal certainty, that said recession is right in front of us. It is right there can’t you see it?
Stopped clock analytical approaches assures us the recession foresight will be dead-on accurate at some point. Maybe “this time” it is right in front of us – maybe.
What is our skin in this important game?
Realizing history offers us that recessions bring with them tremendous downside price action in markets generally and upside opportunity in certain other markets it is a very important question that we take seriously.
Adding to this, historically highly valued stock markets such as we have had for some time here in the U.S. can really take it to the downside if recession is imminent.
With the above we thought it timely to revisit a market based view of the recession question via a segment of the bond market that is very sensitive to any mention of imminent recession.
Click For Larger View: https://fred.stlouisfed.org/graph/?g=nW3a Today’s measure is within the corporate sector of the general bond market. These are known as the “Triple C’s” which are bonds that are rated CCC or lower.
Triple C’s are an excellent weather vane of near-term economic expectations.
When market participants become concerned of the forward economic backdrop they sell these bonds and in so doing the interest rate on Triple C’s skyrocket upward reflecting the new expected risk of these bonds.
The above chart dates back to the 90’s for time perspective. The blue shaded horizontal lines denote recessions since then. We can see the violent upward trend these bonds take on interest-rate-wise when these bond holders feel recession is certainly imminent.
To current day we can see the level is elevated a bit but still remain lower than year ago levels. We continue to watch market based measures such as the above to get a clear view of what collective market participants see when it comes to the question of imminent recession.
As we stand today such measures are elevated some but are not pounding the recession table.
I wish you well…
Director, Market Research & Portfolio Analysis
Portfolio Manager, CAMS Spectrum Portfolio
H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.
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