Interest Rates Are Up... But They're Not Catastrophic

Big, blue-chip companies can always borrow money from somewhere... So-called "investment grade" companies are called that for a reason. They're worth the investment from banks and other lenders. [Chaikin PowerFeed]( Interest Rates Are Up... But They're Not Catastrophic By Marc Gerstein, director of research, Chaikin Analytics Big, blue-chip companies can always borrow money from somewhere... So-called "investment grade" companies are called that for a reason. They're worth the investment from banks and other lenders. And they're at low risk of defaulting on the debt. When a problem arises, it's often in a less-followed corner of the economy... Not every business can get credit as easily as investment-grade companies. They often need to get creative and turn to other lending sources. That's especially true in the current market environment... Everybody is paying more to borrow now than they did a year ago. But as I'll explain today, the data shows that lenders aren't singling out any particular businesses. And that gives the economy a fighting chance to avoid a crash landing... Recommended Links: [TOMORROW: "The Next Wall Street Crisis Has Officially Arrived"]( The world-renowned professor who called the 2008 and 2020 crashes months in advance says what's coming will impact 20x MORE money than the collapse of Silicon Valley Bank and First Republic Bank COMBINED. He's also giving away the name and ticker of a popular stock he believes could go BANKRUPT this summer. By tomorrow, [click here for full details](. ["If I had to put ALL my money into ONE investment, THIS would be it"]( Top analyst goes on record: "This Is it: The No. 1 investment to buy today." For a short time, he's sharing the full details of the best investing setup he's seen in his 20+ year career. A rare opportunity that could make you 10 times your money, no matter what the market does next. [Click here for details before tomorrow's opening bell](. As investors, we often focus on the largest companies. But small businesses play a major role in the economy... According to the U.S. Small Business Administration, these firms typically account for 64% of new U.S. jobs. And they contribute about 44% of economic activity. And yet, the public capital markets don't serve these businesses. To get capital, about 73% of entrepreneurs rely on personal and family savings and other assets. Others turn to business loans (more than 16%) and personal credit cards (around 9%). Anything that helps small businesses raise money is good for employment and the economy. And the reverse is true as well. Now, financial theory and our own personal experience tells us that the folks who supply capital to higher-risk ventures expect to earn higher returns. It's called the "risk premium." This happens all over the credit markets... U.S. Treasury bonds are viewed as the safest investment in the world. Their risk premium is low. So in turn, they come with the lowest yields (interest rates). The U.S. government will pay – even if it has to print more money. The risk premium on large, investment-grade corporate loans and bonds is slightly higher than U.S. Treasurys. So they offer slightly higher yields. Right now, the yield on "AAA" bonds (the most creditworthy group) is around 4.5%. Meanwhile, "high yield" borrowers are more likely to default. This type of debt is sometimes referred to as "junk" – though it's not always that way. The risk premium is simply much higher. A representative high-yield interest rate today is about 8.4%. (That's based on the ICE BofA U.S. High Yield Index.) Rates on small-business loans are harder to pin down. But NerdWallet estimates that small-business-loan rates averaged around 5.1% to roughly 10.5% in the fourth quarter of 2022. Given the similar yields, we'll use high-yield rates as a proxy for small-business-loan rates... By looking at high-yield spreads, we can see whether small-business loans are getting more or less expensive than investment-grade debt. A higher spread means small businesses are suffering more than other borrowers. That would spell trouble for the economy... Remember, these companies are huge job creators. So a wider spread would indicate that they're more strained and less able to employ people. The following chart shows the ICE BofA CCC & Lower U.S. High Yield Index Option-Adjusted Spread. That's a mouthful. Here's all you need to know... This chart tells us the "spread" (difference) between a computed index of all bonds in this bond-rating category and a spot U.S. Treasury curve at any given time. Take a look... [Chaikin PowerFeed] Notice that this spread became exceptionally low during the post-pandemic, stimulus-driven "easy money" spell a couple years ago. But that's an unsustainable level... Lenders need to get compensated properly to take on higher credit risk. Now, the spread looks to be settling near a level that has long been associated with healthy small-business lending. You can see that a spread of about 10% is normal over the past 25 years. So in other words... Today, the yield spread suggests that small businesses can continue to stay in the game. In turn, that suggests a milder recession. And it supports our current outlook on stocks... "[Don't follow the crowd and run for the exits]( Good investing, Marc Gerstein Market View Major Indexes and Notable Sectors # Hld: Bullish Neutral Bearish Dow 30 -0.15% 11 14 5 S&P 500 +0.03% 141 280 77 Nasdaq +0.25% 47 43 10 Small Caps -0.23% 380 973 526 Bonds -1.38% Communication Services +1.01% 7 11 3 — According to the Chaikin Power Bar, Small Cap stocks are somewhat more Bearish than Large Cap stocks. Major indexes are mixed. * * * * Sector Tracker Sector movement over the last 5 days Discretionary +0.88% Information Technology +0.16% Utilities -0.41% Real Estate -0.59% Health Care -0.69% Staples -0.71% Materials -1.38% Industrials -1.38% Communication -1.62% Financial -2.12% Energy -4.68% * * * * Industry Focus Pharmaceuticals Services 6 22 11 Over the past 6 months, the Pharmaceuticals subsector (XPH) has underperformed the S&P 500 by -7.07%. Its Power Bar ratio, which measures future potential, is Weak, with more Bearish than Bullish stocks. It is currently ranked #11 of 21 subsectors and has moved up 6 slots over the past week. Indicative Stocks [rating] COLL Collegium Pharmaceut [rating] ARVN Arvinas, Inc. [rating] PLRX Pliant Therapeutics, * * * * Top Movers Gainers [rating] CCL +5.99% [rating] VTRS +5.82% [rating] AMD +5.79% [rating] WBD +4.42% [rating] LNC +3.62% Losers [rating] CTLT -25.74% [rating] TSN -16.41% [rating] EPAM -4.39% [rating] AES -4.24% [rating] MRNA -3.86% * * * * Earnings Report Reporting Today Rating Before Open After Close CE, WYNN APD, CTLT, DISH, DUK, FOXA, HSIC, J, TDG, WAT AKAM, EA LNC, OXY No earnings reporting today. Earnings Surprises [rating] VTR Ventas, Inc. Q1 $-0.09 Missed by $-0.06 [rating] TSN Tyson Foods, Inc. Q2 $-0.04 Missed by $-0.84 [rating] PLTR Palantir Technologies Inc. Q1 $0.05 Beat by $0.01 [rating] MCK McKesson Corporation Q4 $6.90 Beat by $0.54 [rating] KKR KKR & Co. Inc. Q1 $0.92 Beat by $0.07 * * * * You have received this e-mail as part of your subscription to PowerFeed. If you no longer want to receive e-mails from PowerFeed, [click here](. You’re receiving this e-mail at {EMAIL}. For questions about your account or to speak with customer service, call [+1 (877) 697-6783 (U.S.)](tel:18776976783), 9 a.m. - 5 p.m. Eastern time or e-mail info@chaikinanalytics.com. Please note: The law prohibits us from giving personalized investment advice. © 2023 Chaikin Analytics, LLC. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Chaikin Analytics, LLC. 201 King Of Prussia Rd., Suite 650, Radnor, PA 19087. [www.chaikinanalytics.com.]( Any brokers mentioned constitute a partial list of available brokers and is for your information only. Chaikin Analytics, LLC, does not recommend or endorse any brokers, dealers, or investment advisors. Chaikin Analytics forbids its writers from having a financial interest in any security they recommend to our subscribers. All employees of Chaikin Analytics, LLC (and affiliated companies) must wait 24 hours after an investment recommendation is published online – or 72 hours after a direct mail publication is sent – before acting on that recommendation. This work is based on SEC filings, current events, interviews, corporate press releases, and what we've learned as financial journalists. It may contain errors, and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility.