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Is the longest bull market in history over? The global economy and asset markets have been hit with two major shocks - the coronavirus and oil price collapse - and yes, this has the potential to end the post-crisis rally.

The key sector to watch is U.S. corporate bonds. The excesses, - the bubble - during this cycle is most visible on corporate balance sheets, and if the U.S. corporate bond market gives way, it’s time for equity investors to head for the exits, de-risk their portfolios, and prepare for a bear market.

In assessing whether a bear market is imminent, the important question to ask is “Where is the leverage?”

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Finding the leverage – the markets where funds have been borrowed to buy assets where prices are falling quickly – allows investors to determine whether it’s time to de-risk their portfolios and hunker down for an extended market decline.

In the current environment, the leverage is on corporate balance sheets. Thanks to central bank rate cuts and investors’ insatiable appetite for any instrument with a yield, there’s been an explosion in corporate debt issuance over the past decade.

Domestically, corporate debt has climbed from 80 per cent of GDP before the financial crisis to almost 120 per cent, according to a recent Report on Business feature by Ian McGugan and Tim Shufelt. The value of global non-financial corporate debt has doubled since 2009.

Equity markets became addicted to cheap borrowing costs to a significant extent. Corporate bonds issues at low rates allowed companies to borrow cheaply to buy back stock, pushing equity prices higher. Easy money allowed shale oil companies to quickly expand operations, even when crude prices flagged.

The era of cheap money may be over. According to the Markit CDX North American High Yield Index, corporate borrowing costs are rising quickly. On February 14 of this year, a company with a non-investment grade credit rating could borrow funds at a rate 2.84 per cent above government bonds. Now, that spread has climbed to 5.73 per cent above governments, a rate many struggling companies can’t afford to pay while continuing to generate profit.

The financial issues will be particularly acute in the energy sector. The plunge in crude prices will limit or erase the cash flow necessary to pay interest on their bonds. This dangerous trend will threaten all debt-laden companies exposed to the coronavirus-led global economic slowdown. Borrowing costs will rise while revenues fall.

All is not lost yet. Corporate spreads are now near the levels hit during the market upheaval in 2016 and nowhere near the heights of the financial crisis when high yield bonds paid 20 per cent more than government bonds.

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If, however, corporate borrowing costs continue to climb, the financial leverage that has accumulated on corporate balance sheets will unwind, and this process will include debt defaults and bankruptcies that will end the bull market.

-- Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

Stocks to ponder

Enbridge Inc. Its yield was attractive even before coronavirus fears sent the market down sharply. Now, with the stock dropping about 12 per cent over the past few weeks, the yield has risen to about 6.3 from 5.7 per cent in mid-February. Yield isn’t the only metric on which you should judge a potential investment. John Heinzl takes a closer look at the pipeline operator.

The Rundown

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A very Canadian milestone: ETFs now outnumber stocks on the TSX

The popularity of exchange-traded funds on the Toronto Stock Exchange has reached a once-unthinkable milestone: They now outnumber individual stocks. A frenzy of product launches catering to every conceivable theme, style sector and country has pushed the total number of ETFs above that of actual operating companies on the TSX. Tim Shufelt takes a look.

Others (for subscribers)

Monday’s analyst upgrades and downgrades

Monday’s Insider Report: CEO completes a $26-million trade in this stock

Rob Carrick’s 2020 ETF Buyer’s Guide: International and global equity funds

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The Globe’s stars and dogs for the week

Others (for everyone)

Here’s what the Street is saying as stocks plunge after oil shock

A 7% plunge in the S&P just triggered a trading halt. Here’s how circuit breakers work

Wall Street had 2 terrible weeks. Here’s how 7 traders dealt with it

Globe Advisor

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Are you a financial advisor? Register for Globe Advisor ( for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation - a powerful tool to help you manage your clients’’ portfolios.

Ask Globe Investor

Question: I am interested in the BMO Low Volatility U.S. Equity ETF (ZLU), which trades on the Toronto Stock Exchange. If I hold this ETF in my tax-free savings account, will I pay Canadian tax on the dividends?

Answer: In a TFSA, ZLU’s distributions are not subject to Canadian income tax. However, with ZLU and other Canadian-listed exchange-traded funds that invest in U.S. stocks, dividends from the underlying companies are subject to U.S. withholding tax of 15 per cent. The U.S. withholding tax applies whether the ETF is purchased in a registered or non-registered account. You can apply for a foreign tax credit if ZLU is held in a non-registered account, but not if the ETF is held in a TFSA or other registered account. Taxation of ETFs that hold U.S. stocks is complex. I looked at the subject in more detail here.

-- John Heinzl

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.

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What’s up in the days ahead

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

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You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.

Compiled by Globe Investor Staff

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