Borrowing costs

Higher borrowing costs already very hard

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Citing Fed Chairman Powell’s recent inflationary warning, Goldman Sachs predicts that the US central bank will raise key rates by half a percent at its May and June meetings. the the last time the US Fed hiked half a percent was in May 2000, and the recession began ten months later. In the May 2000 rally, the Dow Jones had already topped in December 1999, the technology-heavy NASDAQ in March 2000. The highs of the resource-focused S&P 500 and TSX followed in August before all fall by more than 47% over the next two years. The Fed was back to cutting rates with an emergency 0.50% cut in January 2001.

As usual, the bond market has also outperformed the Fed this cycle. Treasury prices have already fallen at the price of all seven rate hikes expected over the next nine months. In the process, financial conditions have tightened sharply and a heavily indebted world is struggling to sustain the pace of change.

Even though the riskiest corporate bonds have so far fallen less than Treasuries, their yields (borrowing costs for businesses) jumped above 6% yesterday, from 3.5% in January 2021.

While bank credit has been contracting for many months, public companies have relied on flows of blind investors to finance themselves. Now, there aren’t just more loans that are harder to find. The current equity bear market has also dampened investors’ appetite for equities so far, wiping 31% off the average share of companies in the Russell 3000 Index – one of the broadest indicators of the US stock market. . Refinitiv data confirms that cash raised by companies through the sale of stocks has fallen 88% year-on-year – the slowest start to the year since 2009 during the Great Financial Crisis. A cash crunch is spreading, and this cycle there are more zombie firms – which need to borrow to stay afloat – than ever.

Higher rates and the lure of safe havens are boosting the US dollar, and emerging markets are faltering as their currencies fall, borrowing costs rise and slowing global growth reduces demand for their exports.

The yield on 10-year Treasury bonds is now an attractive whole percentage higher than the dividend yield of the S&P 500. Unlike bonds, stocks offer no return of capital or guaranteed income stream. And after the latest rally in the bear market, the decline in equities continues to be breathtaking. Here’s a top-down view of the S&P 500 over the past year, followed by the NASDAQ composite below since 1997 (both courtesy of my partner Cory Venable).

Higher borrowing costs already very hard
Higher borrowing costs already very hard

And finally, here’s a little comparison of Lance Roberts’ noodle burner of the S&P 500 in 2008 (in blue) versus the 2022 correction so far (in black). What is your risk management plan?

Higher borrowing costs already very hard

Disclosure: No position

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.