The link below is a download of our/my internal spreadsheet noting the history of the last few years' worth of S&P 500 corrections: SP500corrections
Note how in 2014 we’ve seen two very brief S&P 500 corrections, although some might not even call them “corrections”, but rather the random action of Wall Street.
Here is a link from Bespoke, published this past week, on the diverging prospects of taxable high yield bonds and the S&P 500/Russell 2000.
Hopefully, readers can see the chart. Bespoke commentary notes that since June 23rd, which was the peak for high yield prices, junk bond prices and the S&P 500 have diverged. Bespoke thinks the junk bond market could be telling us more about the prospects for the Russell 2000 than the S&P 500 though.
Is the corporate high yield (i.e. junk-bond market) telling us something right now?
My own opinion is that the S&P 500 needs a good flush, but our client portfolios are weighted towards the higher market cap end of the S&P 500, such as the S&P 100, which we think offers better risk / reward than the Russell 2000 today, and we’ve felt this way for some time.
We sold out of our high yield ETFs in 2013, and have no positions of any kind in taxable high yield at present.
From the macro, or “top-down” perspective, the US economy continues to improve, but the glide path off the March, 2009 low is a slower-growth trajectory than previous recoveries given the constraints and constrictions on the financial system, and the return of what-could-be-considered normal real estate markets. This is all very healthy, just slower growth than expected.
The major developed and emerging markets are returning to growth too after the 2010 and 2011 sovereign debt crisis, particularly Western Europe and related economies.
China (Shanghai) looks close to a breakout if you look at the charts, although their economic data should be taken with a grain of salt.
12 – 18 months from now we could be looking at a robust US economy, Western European economies which have fully recovered and have healthy budgets (i.e. a stronger EU), and robust China and Southeast Asia growth.
What a horrible prospect…
Like the Timbuk 3 song, our opinion today is “The Future is so Bright, I Gotta Wear Shades”, but I also think we need another solid, 7% – 10% S&P 500 correction to the stock market, to restore the balance.
In terms of sentiment, newsletter sentiment is pretty bullish, while individual investor sentiment is neutral-to-bearish. That is an interesting dichotomy.
Let’s see if the recent weakness in the taxable high yield market has it right or wrong over the next few weeks. We are entering into a seasonally weak time for the stock market, from late July to early October.
I have been chatting this weekend via email with a blog subscriber who is retired and strictly a high-yield investor. Seems like a very sharp individual. I thought it was Martin Fridson (a long-time authority on the high yield bond market(s)) that wrote an article years ago (probably pre 2008) that if you look at annual high yield returns (and volatility) of the Merrill Lynch High Yield Index, the risk-adjusted return over long time periods is better than the S&P 500. I recall reading this article years ago, and I am not sure how 2008s taxable corporate meltdown which drove high yield spreads to the then unheard of levels of 25% YTMs (yield to maturity), impacted this history, but absolute yields of 5.5% – 6% today in the junk bond market don’t interest me, even with the prospects for a stronger US economy. 8% and 10% absolute yields would get my interest, all other things being equal.
I actually think the municipal high yield market offers better absolute yields today than the taxable market, although the duration on the muni high yield mutual funds is quite long. There is more interest rate risk with muni high yield funds than most investors might be aware of.