ProfitScore Update – June 2023
To the clients and friends of ProfitScore:
A recent study from the US central bank has set off alarms in the financial sector, signaling a record increase in American businesses under financial distress and the possibility of intensified ramifications from the Federal Reserve’s war on inflation. The central bank’s researchers reported that around 37% of firms are floundering, denoting that one of the most significant concentrations of distressed companies witnessed a high not seen since as far back as the 1970s.
As many know, High Yield Bonds have long been a barometer of the equity market. It may be that the lackluster performance of High Yield bonds points to another sign of things to come. Below is the YTD chart of HYG vs. SPY, courtesy of Morning Star.
While High Yield bonds typically track alongside equities, this year’s equity rally has yet to be mirrored in the High Yield sector. The increasing strain on businesses due to rising borrowing costs offers valuable insight into this deviation, revealing not only subdued returns but also a shift from the usual correlation patterns with equities. This divergence raises critical questions about the future of the markets and the potential for sustained financial distress among American businesses.
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