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Rotation Prospects And Corporate Credit Spreads

By Brian GilmartinETFsAug 10, 2020 12:23AM ET
Rotation Prospects And Corporate Credit Spreads
By Brian Gilmartin   |  Aug 10, 2020 12:23AM ET
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First, a quick note of thanks to Jeff Miller, on his two articles on caution warranted on interpreting the nonfarm payroll report.

The first article – which was last weekend or August 2nd – laid the premise for how to interpret a labor report and then the Friday, August 7th article followed up on the original article by detailing the numbers. Personally I never would have thought about “business deaths” or “response rates” in terms of gauging the quality of the monthly business survey. “Teach a man to fish…”

Gary Morrow and Doug McKay (This Week on Wall Street) have been looking for a rotation for a while now, as have so many others given the one way nature of the market.

QQQ Chart
QQQ Chart

This chart posted Friday, August 7th, 2020, led McKay to think the rotation is nigh. Friday’s late trading action was somewhat unusual. large-cap tech sold off, while financials bounced, albeit financials bounced on light volume.

Berkshire (NYSE:BRKb) reported results Saturday, February 8th, 2020 and it showed Mr. Buffett buying back $3-$5 billion in stock. Berkshire isn’t subject to CCAR apparently (like the major banks) so Mr. Buffett is taking advantage of the excess capital and putting it to work buying his shares.

These guys are very good technicians. Be sure and give Morrow a follow on Twitter (@garysmorrow) and McKay on the blog.

One thing I liked about McKay’s comments was that he thought a correction in the Q’s would be “healthy.” The NASDAQ Composite corrected 80% between March, 2000, and July, 2002. I doubt anyone is looking for that level of drawdown again—even for the mega-cap giants—thus owning the giants doesn’t have to be a “binary” decision, i.e. completely in or out.

Other charts on the prospects for “rotation:”

Russell 200 Vs S&P 500 Chart
Russell 200 Vs S&P 500 Chart

The relative strength of the Russell 2000 and the “value” style over the last 12 months is well known.

Both are trying to stem the under-performance vis-a-vis large cap growth since June ’20.

Clients now own some Invesco S&P 500® Equal Weight ETF (NYSE:RSP), the Direxion NASDAQ-100® Equal Weighted Index Shares (NYSE:QQQE), some small-cap Russell 2000 funds directly, including some iShares Russell 2000 ETF (NYSE:IWM), and some SPDR® S&P MIDCAP 400 ETF Trust (NYSE:MDY).

However, wholesale changes away from large-cap and growth have not yet happened. Head fakes in the market happen all the time. I’m more interested in offsetting technology with financials to keep the balance between value and growth.

I had forgotten about this interview Tom Lee did on CNBC this past week. Tom is very good, and very forthright about his opinions. If he’s right, readers want to watch the market leadership. Tom’s bullish opinion implies that the technology Big 5 leadership likely continues, if he is right.

Corporate credit spreads:

Fixed Income - Rates Recap Chart
Fixed Income - Rates Recap Chart

Fixed Income - Credit Recap Chart
Fixed Income - Credit Recap Chart

The top slide from a Goldman Sachs credit call on Friday, August 7th, shows the change in the Treasury curve over the last 8 months, while the 2nd slide showed the change in high-yield and investment-grade corporates, as well as EM (emerging market) debt and MBS (mortgage-backed securities).

While the latest spreads were only as of June 30th, 2020, on the Goldman slide, and have continued to improve since, EM, corporate and high-yield credit continue to offer decent relative value in my opinion, at least for the next few months.

Client weights and allocations are being thought of in terms of “pre” and “post” election postures. Clients remain tactically overweight high-yield and corporate credit risk and have been since April ’20 at least until early Fall’20 and early November ’20.

Corporate credit risk has added nicely to client accounts since the March 23rd S&P 500 low.

Don’t Forget Short-term High Yield ETFs

Short-term High Yield ETFs
Short-term High Yield ETFs

This table was posted to Twitter by LizAnn Sonders on July 9th. It was buried in my Twitter bookmarks while I was working on something else.

Note the “average, annual return” and then standard deviation, for short-term high-yield bonds.

Needless to say clients are long the iShares 0-5 Year High Yield Corporate Bond ETF (NYSE:SHYG), although the SPDR® Bloomberg Barclays (LON:BARC) Short Term High Yield Bond ETF (NYSE:SJNK) probably works just as well.

Sharpe ratio fans would be quite proud.

Thanks for reading, and as always take everything you read on any blog with great skepticism (especially this one), do your own homework, and evaluate all opinions in light of your own financial conditions and profile.

Markets change quickly and change direction suddenly with little notice.

Rotation Prospects And Corporate Credit Spreads

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Rotation Prospects And Corporate Credit Spreads

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