Will the real indicator please stand up?
By Laif Meidell, CMT, president of American Wealth Management, and portfolio manager of the AdvisorShares Meidell Tactical Advantage ETF (MATH)
Above-average volatility in the stock market over the past two months has translated into price swings in the bond market as well. Likewise, with the Standard and Poor’s 500 flattening out over the past week, bond prices have also moved more horizontally. This week we have a bond market where some bonds are higher than others, but there are no major winners or losers.
The one anomaly in this week’s bond performance is the relative performance, or in this case underperformance, off convertible and high-yield (junk) bonds to the S&P 500. Typically convertible and high yield bonds move in harmony with the stock market, but this week they appear to be dong just the opposite. Specifically, the S&P 500 has gained 0.39 percent over the past five trading days while the Barclays Convertible index is lower by 0.14 percent and the Barclays High Yield Very Liquid index has declined by 0.42 over the same period.
This is reminiscent of the old game show “To Tell the Truth.” At the start of the show, a short bio was read of one of the three contestants, and after asking a series of probing questions, it was the panel’s job to determine which of the three players was telling the truth, and which two were the impostors. Looking at the relative performance of the S&P 500 to convertible and high-yield bonds, it begs the question, “Which of the three is telling the truth about the short-term trend of the stock market?” In other words, “are convertible and high-yield bonds telling us the stock market is heading lower over the near term?” We will know shortly who’s telling the truth.
The U.S. dollar has been on the rise recently with the Deutsche Bank Long U.S. Dollar index gaining over 10 percent since early May. The currency exchange has been a significant headwind to those U.S. investors owning foreign bonds, but recent price stability in the U.S. dollar has allowed the value of some foreign bonds to gain some traction. This week’s top-performing bond sector is international corporate bonds, with the S&P International Corporate Bond index gaining 0.81 percent over the past five trading days. Although this was a strong performance during a week that was relatively flat for most bonds, international corporate bonds will need more time for their recent gains to establish themselves in a sustainable uptrend. In other words, patience is required at this time.
This commentary originally published in the Reno Gazette-Journal. Performance numbers used in this article were obtained through eSignal and are not guaranteed to be accurate.