Risk-On Trade Persists but Market Anomalies Abound

Global stock rally continues, with extremely narrow breadth, even as the evidence of economic weakness mounts.

Key Takeaways

• Beneath the Stock Market Records, Zombie Firms Rise: In a week that saw the major averages attain new highs, something else happened that isn’t exactly so joyous. As in, the number of “zombie companies” in the U.S., those that do not have sufficient cash flows to cover their interest expense, hit the highest level since early 2022.

• Main Street Not Seeing the Rate Cuts: Small businesses don’t borrow at the Fed funds rate. The latest NFIB survey showed that the average interest rate for them has not come down this year and stands at 8.8%, the high end of the range of the past twenty years.

• Asset Manager Stocks Diverging from the Equity Rally: In one of the major market anomalies on display right now, as the S&P 500 hits new highs, the share prices of the asset managers have begun to correct to the downside: down more than -10% since mid-September. There is a historical 95% positive correlation between the headline market and the asset managers, and yet they have begun to diverge in a notable manner of late.