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Market Update:
The Canadian economy gained more jobs than expected in September as the unemployment rate stayed unchanged at 7.1%, raising questions about the timing of the next rate cut. In addition, the Prime Minister Mark Carney brushed off calls to retaliate against the U.S. over tariffs on some Canadian exports, saying the two were in talks to figure things out. The Canadian dollar was 71.20 cents USD. The U.S. S&P 500 ended the week up 0.5%, while the TSX was down 0.7%.

It was a mixed week of greens and reds. Consumer staples rose 3.3%, while consumer discretionary and materials gained 1.5% and 1.2%, respectively. Industrials edged up by 0.1%. On the other hand, energy slid by 5.6%, while technology and financials gave up 1.1%, each. Real estate ended the week down slightly, 0.2%. 
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Cockroaches in the Credit Market

Last week during JPM's earnings call, Jamie Dimon used that phrase when referring to some of the fraud that was recently in the auto loan space. There's always been fraud in markets. When he talked about cockroaches, he said that when there's one there's usually many. A lot of the private credit managers spoke up and said that there might be cockroaches in Dimon's neighbourhood, but not in theirs.

At the end of the business cycle everything seems great and wonderful, with markets at all-time highs. Larry brought along some ETF charts to follow along with and see when you need to really worry.

The first chart shows the total return of the high-yield bond ETF, HYG-N. The chart goes back to before the great financial crisis. That same chart also depicts the total return of VTI, the Vanguard ETF that represents the entire US stock market. You can see great gains there. But during the period of recession (whether the GFC or the very brief recession during Covid), you can see the shock to credit markets.

A second, related chart shows a white line representing the yield spread of high-yield (junk) bonds over their government equivalents. When that line rises significantly, it's correlated with weakness in equities. About a year before the GFC, that spread in high-yield bonds started to rise. Based on where it is today, we don't have that same sense of credit risk that we saw back in that period.

So, what does that mean? During Trump's tariff upset in April, the white line jumped towards 5%. So that's 5% above the yield of a government bond. Going back to pre-GFC, it was 15-20%; during Covid, it went north of 10%. So we're nowhere near that level of worry in credit markets. Dimon's comment might be a little bit premature.

He's also brought along a table from Moody's, which shows the average default rate annually all the way from AAA down to non-performing, C-rated bonds. If you add up all the junk bonds (BB, B, and all the C's), it's a little less than 9%. Once that company defaults, the recovery rate is ~40% (so if you lent them $1, you get 40 cents back). When you do the math, on average you could lose about 4-5% in junk bond investments.

One last chart, BIZD, which represents the private credit markets. It's at a very important inflection point here. If that line breaks, it's telling you something.

There are a number of stocks that his firm is in and out of all the time. You can identify a swing pattern of stock moves on a chart in a tight range. Up and down, up and down, all within the range.