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This Well Regarded Indicator Suggests a Benign Backdrop for Equities

October 19, 2016

One well regarded stock market indicator suggests a benign backdrop for equities.

Past stock market downturns often were presaged by rising borrowing costs for companies with weak finances. Stress in the credit markets can create a vicious cycle. First, companies find it difficult to borrow to invest in new projects or refinance existing debt. Next, banks become nervous about losses and begin to withhold new loans. Economic pain ensues. When credit is easy to obtain, however, it is easy for companies to borrow and spend and to refinance their debt.

Borrowing costs for junk-rated debt rose just before the tech and housing bubbles burst in 2000 and 2007. Fears were raised again early this year as the energy market bust sent borrowing costs higher and stocks lower in January and February.

Now borrowing costs have returned to historically normal levels, suggesting credit markets are again healthy. While a downturn in stocks is always a possibility, U.S. corporate health is unlikely to be the trigger, in our view.

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This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.