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Why Record Amount of Corporate Debt Downgrades Could Be Good News for Stock Market and Economy

Why Record Amount of Corporate Debt Downgrades Could Be Good News for Stock Market and Economy. The major credit agencies are notorious for waiting until the last minute when things are really bad to downgrade their ratings on issuers’ debt, particularly for larger companies like those in the S&P 500. That’s because they get their revenues from the very entities they are rating and fear the loss of future earnings if they say bad things about the companies that pay them.  In other words, investors be damned!  In fact, this attitude  to put issuers first has proven disastrous for investors, including during the 2008 financial crisis.

So, here’s the good news. During the past month, according to Jason Goepfert at SentimenTrader, “ratings agencies have downgraded a record amount of debt on firms within the S&P 500 (see charts below)”  This may be a hopeful sign, notes Goepfert. Why? Because if we judge by the past performance of the agencies, “by the time a large number of those companies have been downgraded, most of the declines have already run their course.”

Why Record Amount of Corporate Debt Downgrades Could Be Good News for Stock Market and Economy
Why Record Amount of Corporate Debt Downgrades Could Be Good News for Stock Market and Economy

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Brad Lamensdorf

Brad Lamensdorf, the founder and portfolio manager of Active Alts, is a principal and co-manager of the AdvisorShares Ranger Equity Bear ETF. He previously managed a long-short investment partnership from 1998-2005 under the name Tarpon Capital Management. Earlier in his career Mr. Lamensdorf was an equity trader/market strategist for the Bass Brothers’ trading arm. He managed a short only portfolio in addition to co-managing a $1bil hedging program. He also served as in-house market strategist for the entire internal and external network of Bass Brothers money managers.

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