A POSITIVE vibe returned to the US stock market on Friday, leaving some to wonder whether, after two weeks of losses, the latest sell-off scare was over.
The most recent decline in the S&P 500 marks the third time in six months that the market has looked wobbly and threatened a significant reversal. Each time, so far, it has bounced back quickly.
But what has some investors most worried this time around is the recent, notable underperformance in junk bonds in the past few months. In the past this has been a precursor to bearishness in the equity market.
This is why the next move in credit spreads becomes key. This week is relatively light for economic data.
Investors haven’t run entirely from bond markets, but have shifted funds around. High-yield funds saw an outflow of $2.3bn in the most recent week to 1 October, the most since early August, as they moved money into high-grade corporate debt.
The focus may shift again to escalating conflicts in the Middle East, the weakness of the European economy, or the outcome of Hong Kong pro-democracy protests that are challenging Beijing.
For Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin, the key lies in earnings reports, which begin in two weeks.
He said: “If we don’t get earnings corroborating the [bearish] story being told by spreads, then I think we’ll see the spreads come in.”