London Daily

Focus on the big picture.
Wednesday, Mar 25, 2026

This is a NOT a panic, but adjustment to a mild recession

This is a NOT a panic, but adjustment to a mild recession

Financial panics occur when investors sell what they can, not what they want to. And that happens when they can’t finance their positions.
Credit remains freely available for sound borrowers, and the rise in the cost of credit has been orderly – except for energy companies below investment grade.

There is no sign of sudden liquidation from popular exchange-traded funds that buy high yield debt, despite steep price declines. Equity multiples shrank and probably will shrink further as the market prices in a mild recession during 2020. But that’s a far cry from 2008, when major banks levered US$2 trillion worth of phony AAA-rated securities 60-to-one.

The stock market’s 15% fall from its February peak is painful, but not panicky. The coronavirus probably will cause a mild contraction of US economic activity during the second and third quarters, as travel and hospitality businesses shrink, consumers avoid shopping malls, and Americans, in general, save rather than spend as a precaution.

Consumer spending was the only significant source of US growth during 2019, as investment and manufacturing shrank in response to the incipient trade war. Strong economic data for the first two months of 2020, including an exceptionally large increase in February employment, indicated that the US economy was improving after the conclusion of a “Phase One” trade deal with China – before the coronavirus problem emerged.

Collapsing oil prices are a net negative for the economy, because a large part of the energy sector will suspend operations and cancel orders for capital equipment. But they also put more money into consumers’ pockets, so the overall impact will be limited.

As the chart shows, the cost of high-yield credit has risen sharply, but it remains within a longstanding historical range – except for energy, which blew up as the oil price collapsed. Companies with less-than-investment-grade ratings can still borrow at an all-in cost of 4% to 6%, extremely low by historical standards, given the extremely low overall level of interest rates.

The spread between LIBOR and investment-grade bonds jumped from around 0.4% to 1.2% during the past few days, which means that the total cost of borrowing for investment-grade companies is below 2% (with the 10-year yield at only 0.5%). That is still a record low for corporate borrowing costs. Investment-grade bonds are trading in a liquid market, and their prices track the Treasury market.

The stock market priced in a perfect world, and now it is pricing a less-than-perfect world. In late February the trailing price-earnings ratio of the S&P 500 Index was above 22. It now stands at around 19. The long-term average is 16.62. Given that the dividend yield of the S&P 500 of 1.8% now exceeds the yield on the 10-Year Treasury note by 1%, and is roughly equal to the yield on 10-year investment-grade corporate bonds, equities are not particularly rich. That suggest that once the smoke clears from the coronavirus problem, there will be good reason to buy equities.

There is even better reason to buy Chinese equities with strong businesses (especially in technology) that have little debt and strong domestic markets.

A great deal can go wrong from here, to be sure. If the prospect of a mild recession increases the chance that Sen. Bernie Sanders might win the presidency, there will be good reason to panic. But for the time being, the damage is foreseeable and limited, and markets are pricing it rationally.
Newsletter

Related Articles

0:00
0:00
Close
Trump Signals Frustration with UK Leadership Amid Diverging Approaches to Iran Conflict
UK Government Takes Control of Hunterston B as Landmark Nuclear Decommissioning Begins
UK Public Inflation Expectations Jump Sharply in March, Raising Pressure on Bank of England
UK Ministers Warn Expanded North Sea Drilling Would Deepen Exposure to Global Energy Volatility
Delayed UK Defence Investment Plan Leaves Suppliers Under Severe Financial Strain
Can Iran Strike the UK? Assessing the Real Military Threat as Conflict Escalates
Sanctioned Iranian Banker Linked to Luxury Marbella Villa Through UK Corporate Structure
Casey Bloys Navigates HBO Max UK Launch, Paramount Integration and Industry Buzz Over Netflix Meeting
Iran Conflict Sparks Sharp Turbulence in UK Mortgage Market, Reaching Pandemic-Era Disruption Levels
Major Donor Urges University of Kentucky to Reconsider Mitch Barnhart’s Post-Retirement Role
United Kingdom Moves to Lead International Effort to Reopen Strait of Hormuz
UK Police Investigate Targeted Attack on Jewish Ambulance Vehicles
UK Police Investigate Targeted Attack on Jewish Ambulance Vehicles
Senior UK Advocate Criticises Barnhart Retirement Appointment, Calls for Reconsideration
UK Finds No Evidence of Direct Iranian Threat to Britain, Says Prime Minister Starmer
Assessing Iran’s Strike Capability and the UK’s Readiness Amid Rising Tensions
NATO Unable to Confirm Iran’s Role in Strike on UK-US Base as Tehran Denies Involvement
University of Kentucky’s Youling Xiong Receives SEC Faculty Achievement Award for 2026
Trump Highlights Satirical Portrayal of UK Leadership Amid Talks with Prime Minister Starmer on Iran Conflict
Trump Highlights Satirical Portrayal of UK Leadership Amid Talks with Prime Minister Starmer on Iran Conflict
UK Fuel Prices Surge Toward Crisis Levels as Experts Warn of Further Sharp Increases
UK Fuel Prices Surge Toward Crisis Levels as Experts Warn of Further Sharp Increases
Duchess of Sussex Secures ‘As Ever’ Trademark Rights in Australia Ahead of High-Profile Visit
UK Reaffirms Security as Officials Reject Claims of Immediate Iranian Missile Threat
Rising Middle East Tensions Spark ‘Trumpflation’ Debate Over Impact on UK Households
UK Minister Says No Evidence Iran Can Strike Europe Despite Heightened Warnings
British-Iranians Voice Safety Concerns to Authorities as Regional Conflict Intensifies
Confirmed Meningitis Cases Linked to Kent Outbreak Revised Down to Twenty
UK Government Sees No Evidence Iran Can Strike London Amid Rising Regional Tensions
Debate Grows Over Recognition of Indigenous Cultural Icons in the United Kingdom
Iran Missile Launch Toward Diego Garcia Raises Questions After Failed Strike on US–UK Base
Donald Trump Amplifies Viral Satirical Clip Highlighting UK–US Political Dynamics
UK Satirical Show Draws Attention with Sketch Referencing Trump and Prince Andrew
Meghan Markle’s Possible UK Return Sparks Renewed Attention on Sussex Role
Starmer Convenes Urgent Talks on Cost-of-Living Pressures Linked to Iran Conflict
Starmer Convenes Urgent Talks on Cost-of-Living Pressures Linked to Iran Conflict
UK Investors Eye Bargain Shares Ahead of ISA Deadline Amid Market Volatility
UK Investors Eye Bargain Shares Ahead of ISA Deadline Amid Market Volatility
Northern Lights Expected Over UK Skies Tonight Amid Strong Solar Activity
UK Condemns Iran Missile Strike and Warns Against Threats to British Personnel
UK Warns of Global Flight Disruptions as Iran Conflict Escalates Under Trump’s Leadership
UK Condemns Iran After Missile Strike Targets Strategic Diego Garcia Base
Deadly Meningitis Outbreak in UK Reinforces Urgency of Vaccination Campaigns
Iran Launches Long-Range Missile Strike on Remote US-UK Base, Signaling Expanded Reach
Iran Launches Long-Range Missile Strike on Remote US-UK Base, Signaling Expanded Reach
UK Rules Out Cyprus Base Role in Joint US Self-Defence Framework
UK Ends Hereditary Peerage Rights in Parliament in Historic Constitutional Reform
Lord Walney Warns of Expanding Iranian Influence Networks Within the United Kingdom
Iranian National Among Two Arrested After Attempt to Access UK Nuclear Submarine Base
Deregulation, Artificial Intelligence, and Fraud Laws Reshape UK Financial Services Landscape
×