A Glance at US Corporate Bonds

Over the last two weeks, the S&P 500 has crept higher. Two weeks ago, the S&P moved higher by 0.61%. Last week, the large cap index closed higher by 0.76%. Not only are these moves consistent with our long term Simple Rule signal (bullish) but they were consistent with our bullish signal from our analysis of the weekly charts on 7/23/18.

Volume over these last couple of weeks has been light to moderate, which is consistent with a market that’s creeping higher and with normal activity during summer trading months.  The same factors are associated with a dropping VIX index—markets moving higher and diminished summer trading activity.

Going forward, the daily charts are pointing to a US equity market that’s still a bit overbought. The weekly charts are bullish….again. And our longer term Simple Rule is still solidly bullish.

Keep in mind that all the bullish signals coming from technical analysis do not factor in the extremely overvalued state of the US equity markets—the Shiller PE ratio for the S&P 500 continues to hover near record high levels, levels formerly reached just before the dot-com collapse and the late 1920’s.

On the US economic front, the most there were two interesting developments. The first was a pronounced slowdown in many hard data indicators over the last couple of weeks. Many of these results were simply misses to more optimistic consensus estimates, but still there were many more misses than usual. The other major economic story was the miss in the July payrolls report. Not only were fewer jobs created (vs consensus estimates) but the average hourly wage growth figure—2.7% year over year—came in BELOW the latest consumer inflation figure—2.8% year over year. This means that REAL annual wage growth is now negative, a development that we haven’t seen in several years. Simply put, US wages of US workers are NOT keeping up with inflation….and this is bad for the US economy in many ways.

Finally, as much as we discuss US equity prices from a fundamental and technical perspective, it’s worth noting what’s going on in the US corporate bond markets. One of the best ways to assess value or lack of value in corporate bonds is to examine spreads over comparable US Treasuries. And over the last year or so, spreads for both investment grade (IG) and high yield (HY) corporate bonds have been hovering near record tight levels. This means that now is NOT the time to increase allocations to US corporate bonds. Instead, this is the time to either lighten up on holdings or simply to hold existing allocations steady. The last time spreads blew out:  late 2015 and early 2016. And this was a much better time to buy or to increase allocations…to both HY and IG credit.

But just as prices in the US equity markets swing up and down over long time horizons, something very similar happens in the corporate bond markets yet often not at the exact same times.

And just as our Simple Rule captures these major swings in US equity prices, an analysis of corporate spreads can do something similar for swings in US corporate bond prices.

Stay tuned.

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