The stock market once again failed to recover its upward momentum from last week's rally, opening the month of June with fresh concerns about the economy and the potential impact of inflation and higher interest rates. By the close, the Dow Jones Industrial Average (^DJI -0.98%), S&P 500 (^GSPC -0.46%), and Nasdaq Composite (^IXIC -0.64%) were all down around a half-percent to three-quarters of a percent.
|
Index |
Daily Percentage Change (Decline) |
Daily Point Change |
|---|---|---|
|
Dow |
(0.54%) |
(177) |
|
S&P 500 |
(0.75%) |
(31) |
|
Nasdaq |
(0.72%) |
(87) |
Data source: Yahoo! Finance.
A couple of financial stocks that rarely get much attention in the investing community stood out with their losses today. Both S&P Global (SPGI 0.54%) and Moody's (MCO -1.58%) posted notable declines, and the warning that one of these companies made about the environment it faces has some implications for the broader stock market as well.
S&P sees a deteriorating economy
S&P Global is best known for its bond-rating business, as it gives its opinion on the creditworthiness of companies, state and local governments, and even sovereign nations when they issue debt. With the big boom in interest rates recently, there's been a definite impact on the willingness of companies to add debt to their balance sheets, and that led S&P Global to take dramatic action early Wednesday.
Image source: Getty Images.
S&P chose to suspend its financial guidance for the full year, just four weeks after having provided such guidance along with its first-quarter financial report. The company said that macroeconomic conditions have worsened to such an extent that it has had a negative impact on its expectations for growth in gross domestic product and volume of debt issuance. Accordingly, S&P thought that it couldn't affirm the guidance it had previously given investors.
Some of the business and industry metrics S&P gave were sobering. Debt issuance has been weak so far in 2022, and if current trends persist, full-year market issuance could fall 15% to 20%. The rated bond issuance that S&P gets significant revenue from could be 30% to 35% below 2021 levels, and leveraged loan volumes could drop 40%. That would potentially cause a $600 million hit to the revenue S&P receives from its rating business. That's a big turnaround from the outlook S&P provided in early May, which called for a 40% rise in 2022 reported revenue compared to 2021 .
Shares of Moody's were also down, falling 6% on Wednesday. The company also gets significant revenue from giving bond ratings on debt issuance, and so the comments that S&P gave seemed to apply equally to Moody's.
Yes, bonds do matter
The implications of the latest news from S&P go beyond the bond market. Many companies have relied on cheap debt at low interest rates for years, and the prospect of having to refinance their existing debt with higher-interest loans could be highly problematic.
Indeed, debt problems can snowball. If a company has to pay more in interest, then its financial condition can deteriorate. That can prompt a downgrade from S&P or Moody's in its bond rating, which in turn leads bond investors to demand still-higher interest rates from the company. This spiral can mean the difference between being a viable going concern and facing serious financial problems.
At this point, most companies with debt have used the past low-rate environment to buy themselves some time. However, if high rates persist and that time runs out, it could add to the troubles the stock market has seen so far in 2022.
