David Rosenberg: beware widening credit spreads

David Rosenberg, chief economist and strategist, Gluskin Sheff
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.”