Small-Cap Default Cycle Looms

The Russell 2000 small-cap composite is now back in official correction mode

Highlights

• Debt-service costs for S&P 600 companies hit a record-high of 30% — small caps have not locked in low rates by any means

• Recent dips in bonds are a buying opportunity — especially in Europe, where the credit impulse is at its lowest level since the Eurozone crisis

• Well-anchored U.S. inflation expectations, despite the large oil price surge, give us comfort in our long bonds call

• Market misalignments are now so severe that for equities to make sense relative to credit yields, valuations would need to compress to 12.5x (from 18x)