The stock market continued its recent hot streak Monday as some analysts and investors interpreted Fed Chairman Ben Bernanke’s Friday statement as a sign that the central bank is considering a QE3 program to prop up a troubled economy.
The Dow rallied up 255 points as investors snapped up insurance stocks on reports that damage and payouts results from Hurricane Irene will be much lower than initially feared.
But analysts at Moody’s Analytics put a damper on the celebration by issuing a report that highlights just how troubled the U.S. economy really is and how it could impact investors and corporate earnings going forward.
The report, titled “Credit Risk Signals Crack as the U.S. Recovery Wavers,” found that credit spreads for high yield corporate debt are rising and now stand at 729 basis points -- the highest they have been since October 2008 when the Financial Crisis hit. The historical average is 517 basis points.
Report author Ben Garber, an economist with Moody’s Analytics, told On Wall Street that such wide spreads can “crimp earnings” because they reduce access to capital markets for many companies which, in turn, “leads to less confidence, less spending on investments and hiring and less demand.”
All of these unwelcome factors will undoubtedly have a significant on the broader economy, both in the U.S. and abroad.
Of particular concern to Garber and his research colleagues, he explained, is the debt crisis in the Eurozone. The report notes that European central banks have been purchasing sovereign debt, a move which is “preventing a broad market collapse.” But even so, the situation is worrisome, particularly the longer it continues.
Said Garber, “I think that the baseline case is still that we avoid another recession, but the Eurozone crisis is hanging over the economic outlook for the U.S. economy.”
He added, “Also, at the end of this week we’ll be getting data for August, which I expect to be very poor.”
Among other concerns expressed in this latest Moody’s Analytics report is the latest Institute for Supply Management (ISM) index figure of 51.8, which is the lowest since September 2009, and translates into an annual business growth rate of just 2%. That’s what the rate was at the start of the industrials-led recession of 2001.
The report also notes that the Moody’s Expected Default Frequency (EDF) measure, while not at recession levels, is now at 5.32%.
That marks a one-year high and is substantially above April’s low of 3.25%. As well, the report notes that ratings upgrades “are becoming rarer,” with only 71 expected this quarter, a frequency which would represent a 10-quarter low.