David Rosenberg: beware widening credit spreads

The biggest risk to the ongoing bull market is widening credit spreads, says David Rosenberg of Gluskin Sheff.

907_MW_P16_Guru
David Rosenberg,chief economist and strategist, Gluskin Sheff

Today's highly priced stockmarket is perching on much wobblier foundations than it seems, says David Rosenberg. Housebuilders, logistics stocks, and pharmaceuticals are all "well off their highs", he points out. "What has kept the market near record terrain are a mere six stocks Alphabet, Apple, Amazon, Netflix, Microsoft and Facebook Strip out these six flashy stocks, and the overall market has done practically nothing year-to-date." In the year to mid-July, those six accounted for nearly 80% of the gains made by the S&P 500. That level of dependence on one set of stocks has not been seen since the late 1990s, notes Rosenberg.

The biggest risk to the ongoing bull market is widening credit spreads, Rosenberg tells CNBC. A credit spread is the difference in yield between a US Treasury bond and another bond with the same maturity, but a lower credit rating. If spreads widen, it means investors want more compensation for the risk of lending to a company rather than to the US government. "The corporate-bond market is today's bubble," says Rosenberg it's just a matter of time before it blows up.

"Something tells me in the next six months that we're going to have a dramatic widening in credit spreads." Investors should remember that liquidity (ease of buying and selling) tends to dry up in a bear market so avoid being invested in anything that's too exotic or obscure to get out of in a hurry. "Late cycle, liquidity starts to matter a lot more than earnings do."

Recommended

Why investment forecasting is futile
Investment gurus

Why investment forecasting is futile

Every year events prove that forecasting is futile and 2020 was no exception, says Bill Miller, chairman and chief investment officer of Miller Value …
21 Jan 2021
Why investors should beware of India’s surging stockmarket
Emerging markets

Why investors should beware of India’s surging stockmarket

The BSE Sensex benchmark index has soared by 90% since March, largely driven by foreign investors. But India's bull market is very vulnerable.
15 Jan 2021
US stocks are obviously in a bubble. But is it a rational bubble?
US stockmarkets

US stocks are obviously in a bubble. But is it a rational bubble?

Everyone wants to know if the US stockmarket is in a bubble. But that is the wrong question, says Merryn Somerset Webb. Of course it’s a bubble. The r…
14 Jan 2021
Yes US stocks are in a big bubble. But when will it burst?
US stockmarkets

Yes US stocks are in a big bubble. But when will it burst?

There are plenty of indicators to suggest that US stocks are in a massive bubble right now, says John Stepek. Here, he looks at what might pop it.
11 Jan 2021

Most Popular

Bitcoin: fool’s gold or the new gold?
Bitcoin

Bitcoin: fool’s gold or the new gold?

With bitcoin hitting new highs last week, and close to becoming a mainstream investment, is it really gold for the 21st century?
15 Jan 2021
Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021
The MoneyWeek Podcast: bitcoin special
Bitcoin

The MoneyWeek Podcast: bitcoin special

Merryn talks to bitcoin experts Dominic Frisby and Charlie Morris to get the lowdown on the cryptocurrency to find out why it's such a huge global phe…
15 Jan 2021
Free 6 issue trial then continue to