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We just got a couple of nasty credit scares on the tape. JP Morgan CEO Jamie Dimon is calling them cockroaches.
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If you see one, there are probably more hiding. So investors are asking a very simple question,
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with the Fed still in cutting mode, are we heading into a safer environment for stocks or into a new round of credit trouble?
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B of A’s Savita Subramanian looks at the data and says we might be due for a credit cycle, not in 2008 or not like 2008, but a phase where borrowers get squeezed and lenders, they get pickier.
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So the top gun question of the day that we’re answering on stocks in translation, as we fly into 2026, is the air still clear or are we quietly entering the credit danger zone?
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Let’s start with what a credit cycle even is.
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It’s simply the rise and the fall of available credit in the economy, specifically in bonds and loans that companies use to borrow.
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When money is easy, everyone gets a loan. And when money tightens, only the strongest borrowers make the cut.
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If you’ve ever seen your credit card limit go up in the good times and then get cut back, you have lived a mini credit cycle.
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Now to the big questions for stocks.
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This four square shows how stocks have historically responded to different uh Fed and credit backdrops.
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When many of us hear that the Fed is cutting rates, they think green light. But B of A’s uh B of A reminds us that if the Fed is playing catchup and the economy is actually heading into trouble,
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the worst box for equity is the bottom right one.
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That’s when the Fed is cutting while the credit is tightening. The real danger zone.
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And that’s when growth is slowing. That’s when lenders are pulling back at the same time, even as rates are falling.
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So earnings get squeezed and investors start hitting the sell button.
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The open question for 2026 is whether we have drifted into that box.
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So what makes this potential credit cycle different from the global financial crisis? Well, back in the GFC, the problem sat inside bank loans and housing.
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Today, the risk has shifted to private lenders and shadow credit.
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Instead of housing and banks at the center, B of A flags growth, media and cable borrowers as the new hotspots.
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And whereas public bond loan markets were the story last time, this time around, private credit markets are seeing higher default rates than traditional high yield.
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So where are we right now on the stress meter?
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This blue line right here is our stress barometer. It’s the price of a 10-year Treasury ETF, IEF, divided by the junk bond ETF, HYG. And this is going back to 2018.
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Think of it very roughly as a VIX for corporate credit.
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When the line spikes, investors are dumping risky corporate bonds and hiding in Treasuries, the danger zone.
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When it drifts lower, credit is generally easier.
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And that big spike in the middle shows what happened in the early pandemic when credit market froze, right here.
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But if you look where we are at the far right of the chart, we’re actually off of the 2025 lows, but still pretty muted versus history.
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The biggest spike in 2025 is the post liberation day risk off moment.
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But those two cockroaches Jamie Dimon was talking about didn’t register much. So it’s quite possible they were just one-offs as opposed to warnings of systemic risk.
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So what belongs on a credit danger zone watch list?
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First, watch high yield bonds versus Treasuries.
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Are investors still willing to own risky corporate debt or are they running back into the arms of Uncle Sam?
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Then keep an eye on regional bank stocks. Ticker KRE or KRX.
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Uh these are the lenders to small businesses and also local real estate. If they start rolling over while the Fed is cutting, that is a red flag.
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And watch headlines for media and cable cable debt troubles. Excuse me. That’s one of Savita’s new risk areas and it’s where streaming battles and cord cutting meet higher interest costs.
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Then are weaker companies still able to refinance and roll their debt? Cracks show up in smaller, weaker companies first.
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And then finally, don’t forget Main Street credit stress.
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Watch consumer credit card auto loan delinquencies and households. If they start falling behind in a big way, guess what? Jamie Dimon’s cockroaches move from the private credit basement into the living room.
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Bottom line, we’re nowhere near pandemic territory and much less of the global financial crisis. That’s in the rearview mirror. But investors will be on alert for that danger zone as 2026 develops.
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And tune into Stocks in Translation the podcast for more jargon busting deep dives. New episodes can be found Tuesdays and Thursdays on Yahoo Finance’s website or wherever you find your podcast.