The Junk Bond Market Gets Irrationally Exuberant
And That's Exactly Why A Credit Event Is Likely
Below is an assessment of the performance of some of the most important sectors and asset classes relative to each other with an interpretation of what underlying market dynamics may be signaling about the future direction of risk-taking by investors. The below charts are all price ratios which show the underlying trend of the numerator relative to the denominator. A rising price ratio means the numerator is outperforming (up more/down less) the denominator. A falling price ratio means underperformance.
LEADERS: THE JUNK BOND MARKET GETS IRRATIONALLY EXUBERANT
Technology (XLK) – An Important Two Weeks Ahead
Tech took a minor step back last week, but it’s still the clear leader among U.S. equity sectors. As long as the markets believe that inflation is cooling and the Fed may be done hiking rates, growth sectors could remain in the lead, but a lot will depend on what happens with August CPI this week and the Fed next week. Any unfavorable data could quickly kill outperformance.
Communication Services (XLC) – A Rapidly Evolving Landscape
Communication services has been in this steady uptrend relative to the S&P 500 throughout most of this year, but the rally looks like it might be losing strength. The Disney/Charter fiasco that resulted in a cable blackout for millions of customers is a good reminder that the traditional media landscape is evolving rapidly and likely not in a good way.
Consumer Discretionary (XLY) – Several Catalysts Working Against This Sector
Discretionary stocks look to be regaining some of their footing as growth more broadly comes back into favor. It’s been a rough stretch for retailers as big companies are still warning about consumer weakness despite decent earnings reports. As wage growth slows, credit balances keep accumulating and student loan payments restart, there are a number of catalysts working against this sector again.
Energy (XLE) – High Oil Prices Run The Risk Of More Rate Hikes
Energy stocks keep outperforming on the backing of ongoing production cuts from Russia & Saudi Arabia. As long as that’s the case, it’s going to create some worry about how central banks form policy decisions going forward. Core inflation is cooling, but high energy prices could keep headline inflation running hotter than the Fed wants and that’ll keep more rate hikes on the table.
Treasury Inflation Protected Securities (SPIP) – Energy Prices Are The Wild Card
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