Beautiful Virgin Islands

Tuesday, Jan 20, 2026

This is a NOT a panic, but adjustment to a mild recession

This is a NOT a panic, but adjustment to a mild recession

Financial panics occur when investors sell what they can, not what they want to. And that happens when they can’t finance their positions.
Credit remains freely available for sound borrowers, and the rise in the cost of credit has been orderly – except for energy companies below investment grade.

There is no sign of sudden liquidation from popular exchange-traded funds that buy high yield debt, despite steep price declines. Equity multiples shrank and probably will shrink further as the market prices in a mild recession during 2020. But that’s a far cry from 2008, when major banks levered US$2 trillion worth of phony AAA-rated securities 60-to-one.

The stock market’s 15% fall from its February peak is painful, but not panicky. The coronavirus probably will cause a mild contraction of US economic activity during the second and third quarters, as travel and hospitality businesses shrink, consumers avoid shopping malls, and Americans, in general, save rather than spend as a precaution.

Consumer spending was the only significant source of US growth during 2019, as investment and manufacturing shrank in response to the incipient trade war. Strong economic data for the first two months of 2020, including an exceptionally large increase in February employment, indicated that the US economy was improving after the conclusion of a “Phase One” trade deal with China – before the coronavirus problem emerged.

Collapsing oil prices are a net negative for the economy, because a large part of the energy sector will suspend operations and cancel orders for capital equipment. But they also put more money into consumers’ pockets, so the overall impact will be limited.

As the chart shows, the cost of high-yield credit has risen sharply, but it remains within a longstanding historical range – except for energy, which blew up as the oil price collapsed. Companies with less-than-investment-grade ratings can still borrow at an all-in cost of 4% to 6%, extremely low by historical standards, given the extremely low overall level of interest rates.

The spread between LIBOR and investment-grade bonds jumped from around 0.4% to 1.2% during the past few days, which means that the total cost of borrowing for investment-grade companies is below 2% (with the 10-year yield at only 0.5%). That is still a record low for corporate borrowing costs. Investment-grade bonds are trading in a liquid market, and their prices track the Treasury market.

The stock market priced in a perfect world, and now it is pricing a less-than-perfect world. In late February the trailing price-earnings ratio of the S&P 500 Index was above 22. It now stands at around 19. The long-term average is 16.62. Given that the dividend yield of the S&P 500 of 1.8% now exceeds the yield on the 10-Year Treasury note by 1%, and is roughly equal to the yield on 10-year investment-grade corporate bonds, equities are not particularly rich. That suggest that once the smoke clears from the coronavirus problem, there will be good reason to buy equities.

There is even better reason to buy Chinese equities with strong businesses (especially in technology) that have little debt and strong domestic markets.

A great deal can go wrong from here, to be sure. If the prospect of a mild recession increases the chance that Sen. Bernie Sanders might win the presidency, there will be good reason to panic. But for the time being, the damage is foreseeable and limited, and markets are pricing it rationally.
Newsletter

Related Articles

Beautiful Virgin Islands
0:00
0:00
Close
Trump Aides Say U.S. Has Discussed Offering Asylum to British Jews Amid Growing Antisemitism Concerns
UK Seeks Diplomatic De-escalation with Trump Over Greenland Tariff Threat
Prince Harry Returns to London as High Court Trial Begins Over Alleged Illegal Tabloid Snooping
High-Speed Train Collision in Southern Spain Kills at Least Twenty-One and Injures Scores
Meghan Markle May Return to the U.K. This Summer as Security Review Advances
Trump’s Greenland Tariff Threat Sparks EU Response and Risks Deep Transatlantic Rift
Prince Harry’s High Court Battle With Daily Mail Publisher Begins in London
Trump’s Tariff Escalation Presents Complex Challenges for the UK Economy
UK Prime Minister Starmer Rebukes Trump’s Greenland Tariff Strategy as Transatlantic Tensions Rise
Prince Harry’s Last Press Case in UK Court Signals Potential Turning Point in Media and Royal Relations
OpenAI to Begin Advertising in ChatGPT in Strategic Shift to New Revenue Model
GDP Growth Remains the Most Telling Barometer of Britain’s Economic Health
Prince William and Kate Middleton Stay Away as Prince Harry Visits London Amid Lingering Rift
Britain Braces for Colder Weather and Snow Risk as Temperatures Set to Plunge
Mass Protests Erupt as UK Nears Decision on China’s ‘Mega Embassy’ in London
Prince Harry to Return to UK to Testify in High-Profile Media Trial Against Associated Newspapers
Keir Starmer Rejects Trump’s Greenland Tariff Threat as ‘Completely Wrong’
Trump to hit Europe with 10% tariffs until Greenland deal is agreed
Prince Harry Returns to UK High Court as Final Privacy Trial Against Daily Mail Publisher Begins
Britain Confronts a Billion-Pound Wind Energy Paradox Amid Grid Constraints
The graduate 'jobpocalypse': Entry-level jobs are not shrinking. They are disappearing.
Cybercrime, Inc.: When Crime Becomes an Economy. How the World Accidentally Built a Twenty-Trillion-Dollar Criminal Economy
The Return of the Hands: Why the AI Age Is Rewriting the Meaning of “Real Work”
UK PM Kier Scammer Ridicules Tories With "Kamasutra"
Strategic Restraint, Credible Force, and the Discipline of Power
United Kingdom and Norway Endorse NATO’s ‘Arctic Sentry’ Mission Including Greenland
Woman Claiming to Be Freddie Mercury’s Secret Daughter Dies at Forty-Eight After Rare Cancer Battle
UK Launches First-Ever ‘Town of Culture’ Competition to Celebrate Local Stories and Boost Communities
Planned Sale of Shell and Exxon’s UK Gas Assets to Viaro Energy Collapses Amid Regulatory and Market Hurdles
UK Intensifies Arctic Security Engagement as Trump’s Greenland Rhetoric Fuels Allied Concern
Meghan Markle Could Return to the UK for the First Time in Nearly Four Years If Security Is Secured
Meghan Markle Likely to Return to UK Only if Harry Secures Official Security Cover
UAE Restricts Funding for Emiratis to Study in UK Amid Fears Over Muslim Brotherhood Influence
EU Seeks ‘Farage Clause’ in Brexit Reset Talks to Safeguard Long-Term Agreement Stability
Starmer’s Push to Rally Support for Action Against Elon Musk’s X Faces Setback as Canada Shuns Ban
UK Free School Meals Expansion Faces Political and Budgetary Delays
EU Seeks ‘Farage Clause’ in Brexit Reset Talks With Britain
Germany Hit by Major Airport Strikes Disrupting European Travel
Prince Harry Seeks King Charles’ Support to Open Invictus Games on UK Return
Washington Holds Back as Britain and France Signal Willingness to Deploy Troops in Postwar Ukraine
Elon Musk Accuses UK Government of Suppressing Free Speech as X Faces Potential Ban Over AI-Generated Content
Russia Deploys Hypersonic Missile in Strike on Ukraine
OpenAI and SoftBank Commit One Billion Dollars to Energy and Data Centre Supplier
UK Prime Minister Starmer Reaffirms Support for Danish Sovereignty Over Greenland Amid U.S. Pressure
UK Support Bolsters U.S. Seizure of Russian-Flagged Tanker Marinera in Atlantic Strike on Sanctions Evasion
The Claim That Maduro’s Capture and Trial Violate International Law Is Either Legally Illiterate—or Deliberately Deceptive
UK Data Watchdog Probes Elon Musk’s X Over AI-Generated Grok Images Amid Surge in Non-Consensual Outputs
Prince Harry to Return to UK for Court Hearing Without Plans to Meet King Charles III
UK Confirms Support for US Seizure of Russian-Flagged Oil Tanker in North Atlantic
Béla Tarr, Visionary Hungarian Filmmaker, Dies at Seventy After Long Illness
×