Eq: Large Cap

(New York)

One of the biggest ratings agencies on Wall Street has just put out a stern warning on the junk bond market. Moody’s says that high yield debt may fall “significantly” after a big rally this year. In a quote that captures the general disbelief that has accompanied the junk bond rally this year, Moody’s economist John Lonski says ““High-yield bonds have rallied mightily despite the lack of any observable broad-based acceleration of either business sales or corporate earnings”. Moody’s thinks that if performance of the underlying companies in the space does not improve, then there will be a reckoning, saying ““If the anticipated improvement in the fundamentals governing corporate credit quality do not materialise, a significant widening of high-yield bond spreads is likely”.


FINSUM: Irrational exuberance?

(New York)

The Dow gets a lot of intention in the media, but in the investing world it is relatively rare to see Dow-tracking products compared to those linked to the S&P 500. This has led to a general perception of the Dow being old-fashioned and not particularly suitable for investment because of its odd weighting system. But not so fast (!), over the last five years the Dow has actually outperformed the S&P, and in the last ten it barely trails.


FINSUM: This is quite an interesting finding considering how the Dow is generally treated. If you want to play the Dow, check out the SPDR Dow Jones Industrial Average ETF Trust.

(New York)

There are some very worrying signals coming out of the high yield sector. In particular, stocks at the riskiest end of the market have been underperforming. Bonds rated CCC, CCC+, and CCC-, which are the three lowest rungs before default, have been underperforming all year and that weakness has now reached an “unprecedented size”. What is worrying is that very lowly rated bonds are usually the most influenced by economic perceptions, and it is unusual that with junk rallying so much this year that this cohort has not taken part.


FINSUM: So there are two options for what this could mean. Either it means investors are just being cautious, or much more negatively, that credit conditions are tightening, which would be a sign of a pending economic downturn.

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