While the unpredictability of the trade war between the U.S. and China got the interest of the market, there is another risk could cripple the market. According to a CFRA Research investment strategist, Lindsey Bell, this risk is being undetected by the investors.
On Tuesday, Bell said that the corporate debt is building into untenable levels in the same way that the Federal Reserve is increasing its rates once more.
There is about $9 trillion worth of corporate debt on the balance sheets that is seriously troubling. The corporate debt to GDP ratio has reached a new recurrent high at above 45 percent at the end of the second quarter.
Bell added that it is essential to conduct extensive research on the financial health of a company to avoid facing the dangers of corporate debt. Corporate leverage in high levels can prolong a decline, causing a series of bankruptcies throughout the corporate industry.
For example, small-cap stocks are more likely to have high leverage as compared to large-cap stocks. The Russell 2000 with its 2,000 small caps is more levered than the S&P 500 by up to 2.5 times.
The borrowing expenses increase when the rates of the Fed rise. With that, the corporate loans for interest payments also start to climb.