Watch These Indicators For Weakness

I have always watched the consumer for weakness in the economy–sometimes I simply watch the Univ of Michigan consumer sentiment survey (below)-

At other times I watch some data which is a little more detailed–plus it comes to me in a RSS feed. Below you can see the consumer credit defaults for auto loans, credit cards and mortgages.

Property of Standard and Poors

While I seldom have worries about my investment grade holdings–the net asset value may moves, but I know the income stream will remain in tact. On the other hand many other holdings that are unrated or just ‘junky’ I worry most about a recession and the consumer being 70% of the economy will likely signal ‘recession ahead”.

It is only common sense that the above data should dovetail nicely with employment–so, of course, we watch those number closely as well.

I know the charts above are a bit hard to read–but I think they show that the consumer is generally healthy–coupled with employment being strong–I think it is safe to say if the status quo remains we are good for the next number of months (short of a black swan).

8 thoughts on “Watch These Indicators For Weakness”

  1. A question since I am an apprentice in the preferred world but have added quite a few issues to my portfolio over the past 2 years. In a recession, what in general will happen to a run-of-the-mill preferred price? Down, stable? I realize each issue and its financial health and industry it is in matter but is there a general answer? My thought is if, say the markets are down 20%, then preferreds may see like a 5% hit? Am I dreaming?

    1. Maybe recession with lower rates is not an issue here – inflation would be the boogey man?

    2. As always, it depends. I’m avoiding the recession question for a moment and looking more at equity market declines. With preferreds, you get both equity and interest rate betas. So, if the US market is down 20%, but it’s down so because interest rates are surging higher, the returns may be pretty ugly. If the market is down 20% and interest rates are also falling, I think returns will be -5-10%. For example, in Q418, the price of PFF fell 8% (peak to trough, excluding income).

      If you are bold, look at returns during GFC. They’ll make you uncomfortable for sure.

    3. Yazzer, it depends I would guess. In Great Recession a decade ago everything got smashed including investment grade ute preferreds that were immune to any recession threat. But that was an unusual occurrence. A normal recession could effect securities from companies stressed by recession, but maybe not effect other issues. Also depends how the credit spreads act also.
      Remember, in general, at certain times a perpetual preferred can be the worst of both worlds. It can be a “stock” when equities are cratering or a “bond” when bonds are dropping. In fact some people will not own them for that reason being the capped ceiling in comparison to an equity and less covenant protection and more risk in comparison to a bond. We all have to find our little niche we are content in.

  2. Those are good Tim. I’ll add a couple. For credit stress – Moody’s seasoned baa Corp. bond/ 10 year. On you can chart the unemployment rate back to 1992. $$unemprate and I add a 100 dma. This catches major swings in Spx. And correlates very well. ATB

    1. You need to change chart to weekly and 20 for weekly ma. Right now 3.73% is the level to watch.

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