The Debt Market Sees Trouble Long Before Equities Do
Inside today’s Daily Journal…
Essay: Bonds’ Early Warning Signal
Optimism among manufacturers
Stocks rise, oil prices fall… bombing continues
The government reports on stablecoin yields
Chart Of The Day… Franco-Nevada (FNV)
Today’s Mailbag
Editor’s note: With so many disruptions taking place in the market these days, Porter has turned the Journal over to Marty Fridson, lead analyst for Porter & Co.’s Distressed Investing. For nine consecutive years, Marty was ranked No. 1 in high-yield strategy. He has written seven books, the most recent of which is The Little Book Of Picking Top Stocks… and Marty is such a legend that there is a recently published book about corporate finance that devotes an entire chapter to him. We excerpted last year in the Daily Journal.
Here’s Marty…
Whenever there is a market disruption, bonds tend to notice sooner than equities.
Let’s look at the most recent example: the impending disruption of the software industry by artificial intelligence (“AI”). Specifically, let’s look at the financial-market repercussions that include the mounting demands for redemption by private credit fund investors.
Bond investors saw this coming two months before equity investors.
In a falling-off-the-cliff effect, the S&P 500 Information Technology Index’s price-to-earnings (P/E) ratio plunged from 34.4x on March 18 to 22.1x on March 19. The full S&P 500’s P/E ratio dipped only slightly that day, from 20.7x to 20.5x. So infotech’s valuation premium over the rest of the large-cap universe nearly disappeared, plummeting 12 points in a single day.
While the March 19 adjustment in the equity market inflicted a lot of portfolio damage, it didn’t arrive without some warning. The P/E differential between infotech and the broader market had been compressing for some time.
But investors would have been even further ahead of developments if they’d watched what the bond market was saying.
The bond analogy to the stock market P/E differentials involves this metric: yield spread-versus-Treasuries. That’s the amount of extra interest you receive for owning a corporate bond – which might fail to make all of its scheduled principal and interest payments – rather than U.S. government debt, where that’s not considered a risk.
