Corporate Bonds Keep Telling Stocks Where To Go

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Includes: ACP, AIF, ANGL, ARDC, CIF, CIK, CJNK, DHG, DHY, DSU, EAD, FHY, GGM, HHY, HIX, HYG, HYLD, HYLS, HYT, IVH, JNK, JQC, JSD, KIO, MCI, MHY, MPV, NHS, PCF, PHF, PHT, QLTC, SJB, UJB, VLT
by: Danielle Park, CFA

High yield corporate bonds and stocks traditionally move in close correlation over full market cycles. When valuations are high, so is the downside to capital in both. This chart since 2006 of US high yield bond prices (HYG in green) and S&P 500 stocks (in red) offers some context over the past decade.
Click to enlarge
High yield prices began to plunge in late 2006 as the subprime bomb blew. Stocks joined the descent from late 2007 to early 2009. By the bottom, high yield bonds had lost an average of 38% and the S&P 500 55%. Both then rallied two years, before slumping afresh with global revenues in mid-2011 and rallying into 2013 on QE "liquidity." That was then.

Since 2013, high yield bonds have been diving (down some 18% so far), even as the S&P 500 managed to limp higher into mid-2015 on "FANG" fumes (Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Google (GOOG, GOOGL).

High yield bonds broke below their 2011 support line last fall (horizontal green band above), and so far, continue to drop as 2016 brings rising defaults and write-downs.

One has to wonder whether equity prices will stick to their usual pattern and follow suit. Just following HYG's lead to the 2011 support line (pink band above) would be -40% for the S&P from current levels. And as shown above, high yield debt has not bounced at the 2011 lows. Food for thought.

Disclosure: No positions.