David Rosenberg: beware widening credit spreads

published 3 August 2018

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."

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Alice grew up in Stockholm and studied at the University of the Arts London, where she gained a first-class BA in Journalism. She has written for several publications in Stockholm and London, and joined MoneyWeek in 2017.