Last month marked the longest bull market on record at 3,450 days, with the S&P 500 Index making an all-time high in late August, surpassing the previous record run from late 1990 through early 2000. It has been a remarkable run since the end of the financial crisis, fueled by record-level corporate earnings, artificially low interest rates and some $3 trillion of liquidity provided to financial markets courtesy of the Federal Reserve. Even better, this bull run, which has seen the S&P 500 more than triple off its lows of the 2008 crisis, has been characterized by low volatility and surprisingly few white knuckle moments for investors. It is also the junkiest bull market on record.

What do we mean by “junkiest”? Specifically, we refer to U.S. corporate credit quality, a proxy for which is the ratings distribution of speculative-grade issuers. We measured credit quality in two related ways; the percentage of all speculative-grade issuers rated B- or worse, often referred to as deep junk (Exhibit 1), and an average speculative-grade credit rating based on a numeric shorthand (BB+=1, BB=2…CC/C=7) (Exhibit 2). Both these measures of credit quality in Exhibits 1-2 are juxtaposed against the S&P 500 Index.

Corporate credit ratings during periods of economic expansion are influenced by two distinct and countervailing forces. Credit quality in times of cyclical growth should improve as corporate operating performance strengthens and operating metrics trend more favorably. This is often offset, to varying degree, by more aggressive financial policies during prosperous times, as issuers are disposed to borrow more heavily against improved earnings and cash flows to finance expansion and shareholder returns. The latter typically tends to outweigh the former in the late phases of an expansion, and credit quality tends to weaken, on balance, over the course of an economic upswing. This has been the case during previous expansions of the late 1990s and 2003-2007. But we are in uncharted junk terrain today compared to precedent periods of the last three decades, with corporate credit quality, as measured by ratings distribution, far weaker than at previous credit cycle peaks of 2000 and 2007. It isn’t even close. Much of this deterioration has occurred since early 2015.