Stock markets are confident, banks not so much
The most compelling market event of 2017 so far has been the Dow Jones industrial average’s move through 20,000 (although the average is a flawed measure). But even though investors have been pushing up the value of shares, the level of credit of the electorate has been going down.
That is the conclusion of a new service called Credit Benchmark, whose ingenious idea is to collect the private credit ratings used by banks (in other words, the ratings derived from risk models inside the bank). At the moment, the service receives data from 13 banks although another 12 have signed up; it has a rating for 10,000 companies. Donald Smith, one of the founders of the company says that banks tend to be more conservative in their approach than the rating agencies and move their ratings faster.
The chart shows the credit risk index (likelihood of default) for the Dow components. Over the past year, the average grade has dropped one point, from A+ to A; 23 of the 30 Dow components were downgraded. This could be due to fear of higher interest rates, and the impact this will have on companies’ finances; it may be due to concern about the prospects for trade disputes between the US and its neighbors. But these differences do not tend to last long. The equity market is counting on Donald Trump to boost the US economy; if investors are right, credit ratings will improve. But unless economic conditions improve, the US equity market appears overextended.