The financial world can be a scary place. It seems like there is always something to fear in the market. Fortunately, our worst fears usually don’t come to fruition.  To get in the Halloween spirit however, we have posted five scary charts to keep you up tonight. Stay tuned in the coming weeks for the “charts we are thankful for.”

1) Corporate Debt

U.S. corporate debt is at an all-time high of over 45% of GDP[1]. Corporations have taken advantage of historically the low interest rate environment and loaded up on debt.

Secondly, lower credit quality bonds make up a much large share of the investment-grade corporate bond market. BBB or Baa ratings are the lowest rung of the investment-grade rating scale, so these ratings imply a greater risk of default than investment-grade issues with higher ratings, like those rated “A” or above. This increase in low credit bonds poses significant credit risk to investors.

What’s been driving these trends? It’s likely due to the low interest-rate environment of the past nine years.  For years after the financial crisis of 2008 and 2009, interest rates and bond yields hovered at or near all-time lows. U.S. corporations took advantage of this by issuing more and more debt with low coupon rates. However, notably, much of this is long-term debt.  This helped lower firms’ interest expenses but also helped push back the risk of default. With fewer bonds coming due in the near term, corporations were able to reduce their refinancing risk.

But this does pose a risk in the long run—that mountain of debt needs to be repaid or refinanced at some point. If refinanced, the debt could potentially be refinanced at higher yields and increase firms’ interest expense.

2) Rising Interest Rates

The 10-year Treasury yield recently reached a seven year high of 3.23% and has broken out of a 30-year trend of falling interest rates. The chart above shows the 10-year US Treasury Yield from 1062 through today. The blue line highlights the upper and lower points 30 years. Recently the yield has broken out. Could this be a sign of a new trend?

3) Stock Trend Break Down

The 200-day moving average is a popular trend indicator that investors use to determine the longer-term trend of a specific market or stock. It is a simple metric – it averages the closing price of a specific asset over the last 200 days. In the chart above[2], the blue line represents the S&P 500 Index and the dash lined is the 200-day moving average of that index. The recent correction has taken the S&P 500 index below its 200-day moving average, indicating a breakdown of the positive trend that has taken place over the last two and half years in U.S. stocks.

4) U.S. Stock Valuations

The cyclically-adjusted price-to-earnings ratio (or CAPE) shows that the S&P 500 is hovering near 1929 valuations and is the most overvalued it has been since the late-1990s Dot-com bubble. The CAPE ratio divides the current price by the average of the last 10-years of earnings. Other valuations measures come to the same conclusion: valuations in the U.S. stock market are near their highest levels in history.

5) Federal Debt

Gross federal debt stands at a massive $21.2 trillion[3] and it is expected to get worse before it gets better. In June, the Congressional Budget Office estimated federal debt held by the public will rise from 78% of GDP at the end of this year to 96% in 2028. That would mark the highest percentage since 1946. The report warned such high and rising debt due to higher spending and lower revenues would have “serious negative consequences for the budget and the nation.”

Happy Halloween!

[1] Federal Reserve Economic Data. Shaded areas represent recessions.

[2] Ned Davis Research

[3] CNBC, July 2018

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INDEX DEFINITIONS

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. It cannot be invested into directly.