(New York)

By now one would have expected junk bonds to have experienced a large selloff. The sector already had a low spread to Treasuries, has mountains of fringe credits, and has been facing a period of rising rates. Yet, high yield has been performing very well, with the weakest credits, paradoxically, performing best. There has been no sustained flight out of the sector, and spreads are higher than at the start of the month, but still not even where they were for much of the year.

FINSUM: The big risk here is that investors aren’t being paid enough for the risks they are taking. The whole junk sector, not to mention the loads of BBB credits that are technically investment grade, are very susceptible to recession and higher rates. At some point there are going to be some major losses.

(New York)

Whether investors like it or not, the market seems to have finally come to grips with the reality of higher rates. That realization has started to change the performance of different assets from even a week ago. So who will win and who will lose? On the positive side, financials and banks seem likely to benefit, as they make a great deal of their income from interest. Energy and materials stock are likely to shine as well as they benefit from the expanding economy. On the losing side will be utilities, housing, and autos stocks, all of which are sensitive to higher rates in their own ways. No one can be sure how tech might respond, as the sector is young enough that there is not good evidence to say how it might react.

FINSUM: The business case for how most sectors will be impacted by higher rates is clear. If only share performance were so simple.

(New York)

One of the big beneficiaries of all the geopolitical events of this year, as well as of rates hikes, has been small caps. Smaller companies tend to perform better in economic expansion, and they look more likely to hold up to foreign trade tensions as they have a more domestic focus. After hitting records in August, small caps are now in correction territory, having lost 10% from their high. They are now underperforming large caps for the first time this year as many see trade tensions easing.

FINSUM: Small caps sometimes suffer at the end of economic expansions, so this move makes sense. Still an almost 9% loss in the Russell 2000 this month is rough.

(New York)

One of the big mysteries in this recovery has been the fact that wages have not risen much despite the fact that employment has expanded greatly. Investors have gotten used to massive amounts of new jobs being created, but also to quite meager wage gains. Economists have been somewhat stumped as to why, but a new explanation makes a lot of sense—monopsony. Those with an economics background will immediate recognize the term. It refers to when there are many suppliers of something but only one buyer. In this case it is being applied to the labor market—there are tons of available workers, but quite few employers, especially in more isolated locations. This means the employer has sole negotiating power in dictating wages, leading to widespread wage stagnation despite a competitive labor market.

FINSUM: This seems like the outcome of all the corporate consolidation that has occurred over the last few decades. There are less employers, so they collectively have more power to hold down wages.

(New York)

We have just experienced a major market rout. Stocks are off over 5% in the last two days, largely because of almost esoteric worries about rising rates. The big question for investors is “where do we go from here?”. Well the Financial Times has tried to answer the question, and their answer is pretty simple—higher. The paper thinks this tumult will prove short-lived as they contend that it is really recession that ends bull markets, and the US isn’t anywhere near one right now. They suspect corporate earnings will come in strong in the next month and right the market ship.

FINSUM: We agree that this seems like the most likely outcome of the current rout, especially given the strength of the economy. However, we do have an outside worry that investors’ minds are finally changing about the risk/reward of stocks given rising rates and a toppy-looking economy.