For the last three years, junk stocks beat quality stocks by the widest margin ever.

From November 2023 through June 2026, a portfolio that owned America’s highest-quality businesses and sold short its lowest-quality businesses lost 36%. That’s the worst stretch ever for quality stocks versus junk stocks.

The opposite normally occurs. Hedge funds make money buying great companies (quality) and selling weak ones (junk). But during rare periods, the market’s discounting mechanism breaks down and, for a little while at least, junk beats quality.

When this happens in conjunction with tech-stock mania, it’s a stark warning that our economy is heading for trouble. Let me explain how all this is measured and then I’ll explain what it means for us today.

I’m sure as an investor you’ve had the experience of buying a very good business that keeps racking up great earnings results, but that the market seems to steadfastly ignore. It’s almost like the market is broken.

And, in fact, there are times when the market’s normal function does break down.

Cliff Asness, who earned his PhD in finance at the University of Chicago, created a metric to identify and quantify when this happens and for how long. It’s called the Quality Minus Junk Factor (“QMJ”).