Every time the junk bond market catches a cold, everyone asks if the stock market’s going to get sick—and it drives me crazy. It was a topic I mentioned in a column from the SALT Conference in May, when I quoted a hedge fund manager who described the bond market as backward-looking, judging by the billions of dollars in dumb money that has come in chasing yield. And I brought the subject up again last month, when I downplayed the idea that a losing streak in the junk-bond market—theiShares iBoxx $ High Yield Corporate Bondexchange-traded fund (ticker: HYG) had dropped 1.2% from the end of October through Nov. 9—meant that stocks were set for a fall. We know now that wasn’t the case, as the Standard & Poor’s 500 just had its best week since December 2016, and no one seems to be worried about junk bonds anymore. But if high-yield bonds aren’t predicting imminent doom every time they drop, what are they doing? Marty Fridson, chief investment officer at Lehmann Livian Fridson Advisors, has an idea: the exact same thing stocks are. He notes that when junk bonds were falling—the iShares high yield ETF dropped 1.5% from Nov. 1 through Nov. 15—the S&P 500 fell 0.6%. And when bonds bounced back with a 1.4% rally from Nov. 15 through Nov. 24, stocks did too: The S&P 500 gained 1.5%. Junk-bond indexes dropped nearly three times as much as the S&P 500. But there’s an easy explanation for that, too, Fridson says: the composition of the stock and high-yield bond indexes. He notes that the drop in high-yield bonds was led by telecommunications and media companies. The ICE BofAML High Yield Index, for instance, has 61 different issuers; only five companies associated with those bonds are in the S&P 500. “Some financial commentators suggested that as the high-yield market plunged in the first half of November, the stock market blithely continued its 2017 rally,” Fridson says. “The numbers tell a different story.” If you’re looking for another sign that junk bonds and stocks respond to the same things, look no further than last Friday’s selloff that wasn’t. When news broke that former National Security Adviser Michael Flynn would plead guilty and testify against President Donald Trump, theiShares iBoxx $ High Yield Corporate Bond ETFtumbled 0.6% from peak to trough, while the S&P 500 slumped 0.2%. Once again, junk bonds and stocks showed themselves to be whipsawed by the same forces. There’s a good reason for that. “Fundamental information about securities issuers is equally accessible to fixed-income and equity investors,” Fridson says. “There is no obvious reason why one group should ignore it.” Heck, junk-bond managers aren’t even that dissimilar from active stock managers. Just as stockpickers have been benefiting from the decreasing tendency of equities to trade in unison, bond managers are beginning to benefit from the same forces. Justin Lenarcic, global alternative investment strategist at Wells Fargo, contends that there will be greater dispersion of returns among individual high-yield bonds. “We anticipate a strengthening opportunity set for credit-oriented strategies,” Lenarcic says. Just as he is for equity strategies. Remember that the next time you hear someone tell you that junk bonds know more than you do. Email:ben.levisohn@barrons.com https://www.barrons.com/articles/relax-junk-bonds-arent-predicting-a-market-crash-1512187012
Not really disagreeing with this but I'm pretty sure most junk bond indexes and the bigger ETF's are overweight energy. They are skewed to the biggest issues. Also some analyst's think junks recent underperformance was due the the economic cycle nearing the end. Just saying...
I agree, as of now. Many think the FED will try to invert it, risking growth to protect against any run away inflation.
Paul Volcker is not running the Fed anymore. US government inflation figures are rounded(manipulated) downward.
"One market expert says the financial system could collapse at any moment" it is like a game of musical chairs. then at any moment the music could stop.
Tim Ferriss thinks markets are in a bubble... http://fortune.com/video/2017/12/01...given-in-the-world-of-investing/?iid=sr-link2