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

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

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

The clearest catalyst for the turnaround is the change in posture from the Federal Reserve, which has taken an open-ended hiatus from interest-rate hikes and will soon stop letting bonds roll off its balance sheet. The ensuing drop in yields on safe-havens like Treasuries has been a tailwind for riskier assets.

In the current case, the high-yield index has been striking new tops since early February. Meanwhile, the S&P, up 22 per cent from its December low, is about 2 per cent short of last fall’s record and the Russell 2000, the benchmark for small-cap stocks, is around 10% below its high-water mark.The drive higher in both markets is occurring against the most uncertain economic backdrop in several years, a suddenly clouded horizon that drove the Fed to cut short a three-year tightening cycle.

“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.

 

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