Credit Markets Fail to Confirm Stock Rally
Credit markets are starting to waffle again and that’s bad news for common stocks.
The last bear market rally off the November 20 lows also saw credit markets gain traction in unison with global capital markets. That rally, which died in January and saw the S&P 500 Index plunge to a 12-year low on March 9, was at least accompanied by a compression of credit yields or narrowing credit spreads.
But this bear market rally off the March 9 lows is not being accompanied by a rally in most credit markets. Investment grade corporate bond yields as defined by the Barclays U.S. Corporate Bond Index are now just 96 basis points (0.96%) away from their credit crisis peak last October – an ominous sign as stocks race higher.
Investment grade debt now yields an effective 8.13% or 513 basis points more than benchmark 10-year Treasury bonds. The last time we saw spreads this high was in early October 2008 and before that all the way back in 1933. A surging stock market should be confirmed by declining investment grade bond yields.
The S&P 500 Index is now up 15% since hitting a 12-year low earlier this month. This marks the third bear market rally for equities since stocks hit all-time highs in October 2007. And in all likelihood, this rally will also fade away because several important indicators are failing this month.
Other indicators worth watching carefully amid this rally include the number of NYSE stocks above their 50-day moving average, the advance-decline line, new highs versus new lows and total market trading volume. None of these indicators point to a new bull market.
Still, if you have at least a five year investment horizon, I believe equities at these prices offer a good entry point in the context of a dollar-cost-averaging program. This strategy can be implemented by adding to your stock market exposure every three months, regardless of where the market is trading. Indexing will work best for this plan because they’ve been hammered.
Stocks still offer fair values at these prices and will probably get even cheaper before this bear market is over. I started buying stocks for my personal account earlier this month while selling my reverse-index hedge. But I’m planning on accumulating even more stocks over the next 6-12 months regardless of price action because equities are fair value at these levels.
The last bear market rally off the November 20 lows also saw credit markets gain traction in unison with global capital markets. That rally, which died in January and saw the S&P 500 Index plunge to a 12-year low on March 9, was at least accompanied by a compression of credit yields or narrowing credit spreads.
But this bear market rally off the March 9 lows is not being accompanied by a rally in most credit markets. Investment grade corporate bond yields as defined by the Barclays U.S. Corporate Bond Index are now just 96 basis points (0.96%) away from their credit crisis peak last October – an ominous sign as stocks race higher.
Investment grade debt now yields an effective 8.13% or 513 basis points more than benchmark 10-year Treasury bonds. The last time we saw spreads this high was in early October 2008 and before that all the way back in 1933. A surging stock market should be confirmed by declining investment grade bond yields.
The S&P 500 Index is now up 15% since hitting a 12-year low earlier this month. This marks the third bear market rally for equities since stocks hit all-time highs in October 2007. And in all likelihood, this rally will also fade away because several important indicators are failing this month.
Other indicators worth watching carefully amid this rally include the number of NYSE stocks above their 50-day moving average, the advance-decline line, new highs versus new lows and total market trading volume. None of these indicators point to a new bull market.
Still, if you have at least a five year investment horizon, I believe equities at these prices offer a good entry point in the context of a dollar-cost-averaging program. This strategy can be implemented by adding to your stock market exposure every three months, regardless of where the market is trading. Indexing will work best for this plan because they’ve been hammered.
Stocks still offer fair values at these prices and will probably get even cheaper before this bear market is over. I started buying stocks for my personal account earlier this month while selling my reverse-index hedge. But I’m planning on accumulating even more stocks over the next 6-12 months regardless of price action because equities are fair value at these levels.
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