Junk bonds suggest U.S. stocks may have further to run

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U.S. stocks just wrapped up their best quarter in nearly a decade, coming within...

NEW YORK - U.S. stocks just wrapped up their best quarter in nearly a decade, coming within a stone’s throw of a record high.

“We think this cycle has a lot more time than think,” said Krishna Memani, chief investment officer at Oppenheimer Funds. “It’s not ending in 2019 and it’s not ending in 2020. It has a few more years to go.” While the two frequently move in lockstep, junk bonds have often taken the lead in demarking major turning points or signaling that both sectors may be heading into uncharted territory.

Of even greater importance for stocks and high-yield bonds, the outlook for corporate profits - the fundamental driver in both markets - is weakening. S&P companies’ earnings may have fallen in the first quarter for the first time since 2016, according to Refinitiv data, and full-year 2019 profit growth is seen as less than half the pace of 2018’s tax-cut fueled pace.

“Both markets are getting onto this weird cycle where they’re pointing fingers at each other in the absence of any economic news.”Still, equity markets are flashing green, and market volatility, which rises when investors are anxious, is not far off last fall’s lows when stocks were last at a record.

Credit spreads, or the amount paid to investors above Treasury yields to compensate for holding riskier debt, are also cause for optimism.

 

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