Amid Gloom, Balance Sheets Shine

As geopolitical turmoil roiled the stock market last week, it was easy to forget something so crucial to remember as earnings seasons heats up: Corporate America hasn't looked so financially secure since the 1960s.

Credit markets, ratings actions and cash balance sheets tell us that companies are unlikely to close their wallets, hinting at the potential for a recovery by the beleaguered stock market.

Stability in the credit markets last week stood in stark contrast to the (near) panic in the stock market, which sent the Nasdaq Composite down 4.4% for the week to its lowest level since October. The Dow fell 3.2% last week, while the S&P 500 shed 2.3%.

Conversely, spreads on high-yield bonds averaged 333 basis points over comparable Treasuries Friday, tighter (or better) by 18 basis points from the start of the year, and still not far off their historic tight levels of 270 reached in 1997. Junk bonds are a virtual Zen Buddhist monastery compared with the recent bleeding in the stock market.

"The high-yield market never went along for that ride [equity market volatility] with the same ferocity," says Christopher Garman, chief high-yield strategist at Merrill Lynch. "The bottom line is that the credit markets are less prone to bouts of enthusiastic optimism or pessimism, and instead just look at the likelihood of getting debt repaid."

Indeed, bond investors essentially focus on companies' financials and ability to repay debt. Meanwhile, stock investors focus on earnings growth and forecasts, which can cloud the true picture of corporate strength -- especially when geopolitical strife is sending oil prices to record highs. Relatively tight spreads, or risk premiums, for even high-yield bonds -- which typically track the equity market more closely than high-grade corporates -- reveal a sense of security in companies' financial health.