Bankruptcies on the Rise: Temporary Adjustment or Ominous Sign?

Recent data reveals bankruptcy filings have climbed to levels comparable to the Great Recession in 2008 and the COVID-19 pandemic downturn in 2020.

🚨 BANKRUPTCY FILINGS SURGE TO DANGEROUS LEVELS

Bankruptcy filings have recently reached levels on par with the Great Recession in 2008 and the 2020 COVID-19 pandemic.

This indicator often suggests that the economy isn’t performing well, and has historically always been… pic.twitter.com/CJKQnTRhTc

— Whale (@WhaleChart) September 24, 2023

Total bankruptcy filings recently matched figures seen during those prior crises. Some analysts take this as an omen of impending market crashes based on historical patterns.

However, the current forces driving bankruptcies differ from past episodes in key ways. 2008 resulted from systemic financial vulnerabilities, while mass closures sparked 2020’s wave. Today’s catalysts include lagging pandemic-era fiscal support and inflation-straining household budgets.

Nonetheless, mounting bankruptcies signal financial duress impacting American households and businesses. This matches other recession warning signs, like declining durable goods orders and manufacturing activity.

While total filings match prior recessions, businesses make up a larger portion compared to 2020. Some struggling firms are now liquidating after limping through the pandemic.

This points to a selective downturn rather than a broad deterioration, though rising interest rates threaten the economy as a whole. The question becomes whether bankruptcies are a temporary adjustment or a precursor to mass insolvency.

In the first half of 2023, U.S. Chapter 11 bankruptcy filings experienced a significant increase of 68% compared to the same period in the previous year, as reported by Epiq Bankruptcy, a provider of U.S. bankruptcy filing data.

Several notable companies, including SVB Financial Group, Envision Healthcare Corp., Bed Bath & Beyond, Party City Holdco, Lordstown Motors, and Kidde-Fenwal, faced financial difficulties attributed to historically high-interest rates and persistent inflation as the period of easy access to capital came to an end.

Moreover, bankruptcy data reveals pockets of weakness in the economy’s foundation. But its signal must be carefully interpreted, given unique conditions relative to past eras.

While bankruptcies bear monitoring, they have not consistently predicted market crashes when adjusted for context. The exact implications that rising bankruptcies could have on the stock market can also not be validated with precision.

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