Market Sentiment Peaking?
I'm not trying to call a top here, and I'll be the first to admit that this current market rally has lasted much longer than I thought it would. That being said, I see more and more signs every day that market sentiment may be getting closer and closer to peaking. Today, Bloomberg reports Stocks Likely to ‘Catch Up’ With Corporate Bonds: Chart of Day.
Sept. 22 (Bloomberg) -- Stocks offer greater value than bonds and are poised to “catch up” with a rally in corporate debt, according to Rod Smyth, chief investment strategist at Riverfront Investment Group LLC.
The CHART OF THE DAY shows that the difference in yield between corporates and 10-year Treasury notes has narrowed more quickly than the Standard & Poor’s 500 Index has risen since March. The yield comparison is based on a Moody’s Investors Service index of Baa-rated debt. Smyth and colleagues Bill Ryder and Ken Liu had a similar chart in a report yesterday.
Since December, the yield gap has fallen to 2.9 percentage points from a peak of 6.2 points, according to data compiled by Bloomberg. This spread is near its lowest level since January 2008, when the S&P 500 was about 22 percent higher.
“‘Animal spirits’ are returning to Wall Street even if they are still suppressed on Main Street,” the report said. Spreads have narrowed so much that stocks have more room to rise than bonds, especially as earnings increase, it added.
To say that stocks offer greater value than corporate bonds does not necessarily say much at today's levels. Both have had a meteoric rise for the last several months, and I think both come with a lot of risk.
Underlying economic data has continued to deteriorate while the risk implied in corporate bond prices has plummeted. This doesn't add up and can only last for so long in my view. There may be some value in a few corporate bonds, but in general, I feel that the risk has been vastly understated, and these bonds are set to go lower.
I think it is obvious that stocks have been overbought as well, rising 50% since early march! Of course, stocks and bonds could both continue their rises for many more months, but at some point this steam has to run out, and putting new money into either of these right now seems crazy to me.
I will be keeping my eyes on the corporate bond markets to see when financing may start getting more difficult, and this may be a key sign of when the markets may have a turn towards the downside.
In the mean time, "Animal Sprits" can continue to pour more money into the stock market, and we will see when the pool of greater fools runs out. I feel it will be sooner rather than later, but I also did not imagine this rally lasting for as long as it has. Let's keep an eye on things and wait for signs of changing sentiment.