Recession Fears Abating

by Marilou Moursund on March 8, 2016

in Debt,Economic Indicators

An article in the WSJ this morning titled “Junk-bond Rebound Signals Easing Fear” is an interesting read. From the linked article: Returns on junk bonds, debt issued by heavily indebted companies that carry low credit ratings, turned positive for 2016 this month, reversing a sharp selloff at the beginning of the year. Investors poured nearly $5 billion into junk-bond mutual funds and exchange-traded funds in the week ended March 2, the biggest such inflow on record, according to data from Thomson Reuters Lipper. The revival is noteworthy because the junk-bond market is widely watched for clues about the state of the U.S. economy. Companies issuing junk debt

have less financial flexibility to weather a downturn than higher-rated firms, often making the performance of their bonds an indicator of broader economic health. The junk-bond surge is among the most convincing signs that the recession fears that rattled markets earlier this year have faded. Starting in late 2015, junk bonds were hit by heavy selling, the closure of a fund overseen by Third Avenue Management LLC and deepening commodity-price declines. There has also been a strong rebound in commodity prices, and some of the numbers out of Europe have started to improve. Germany just reported a much stronger industrial production number than expected. It came in at 3.3% for January and is the biggest increase since September of 2009. The market has experienced a strong rebound as well. From the Yardeni Research Morning Briefing today: The stock market meltdown at the start of the year has been almost completely reversed by a melt-up. The S&P 500 plunged 10.5% from the closing low at the end of last year to this year’s low of 1829.08 on February 11. It is up 9.3% since then, rising above its 50-day moving average and nearing its 200-dma. It is only 2.2% below where it ended last year and 6.1% below last year’s record high of 2130.82. Among the 10 sectors of the S&P 500, five now are above where they ended last year: Telecommunication Services (11.0%), Utilities (8.2), Consumer Staples (2.7), Energy (1.1), and Industrials (0.6). Five remain below last year’s closing prices: Financials (-6.9), Health Care (-6.7), Information Technology (-3.0), Consumer Discretionary (-2.1), and Materials (-0.4).

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