September 2, 2015

There is no trip wire set up to cause the U.S. market to fall into a bear market. Corrections continue to be buying opportunities.


Throughout history, for a correction to turn into a bear market, a catalyst has been needed beyond valuation levels and earnings trends. Specifically, bear markets need credit destruction. The credit seizures can come from approaching debt maturity headwalls for corporations for which they greatly struggle to refinance. It has also come from excessive investor leverage, such as investor margin accounts. Today, corporate and investor balance sheets are not flashing signs that would imply the current correction could turn into a bear market. This current correction is looking similar to the opportunities we saw in October 2014 and Spring 2013 before that.

 

  • The S&P 1500 has no material debt maturity headwalls over the next five years that would cause concern about refinancing risk. Debt maturities are relatively stable over the next several years, cash flows consistently exceed operating and debt obligations, and cash on hand levels offer a strong cushion on top of that. There appears to be no catalyst for credit destruction for the S&P 1500.

 

  • When looking at the mid-cap and small-cap names in the S&P 1000, a debt maturity headwall does emerge in 2018. Debt service jumps materially and if operating cash flows don’t remain stable by 2018, one could expect some market turmoil because of it. However, this issue is still three years away.
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