Stocks Are Listening
In this sense I view corporate bonds spreads as a coincident indicator to stock prices: there is a positive correlation, but not always and not always to the same degree. It is often dangerous to rely on one indicator as a panacea to equity investing.
Longer term bullish sentiment measures are and have been at extremely high levels, a 10 on a scale of one to ten. Shorter term sentiment measures are not quite as high, but still very high. Although these measures have been useless lately, they still show a head wind against stock prices as mutual fund cash is almost non-existent.
The belief that it doesn't matter why corporate spreads are tight, that only the fact that they are is important, is dangerous. The market is driven by decisions made by human beings, and we all know that sometimes those decisions are not well thought out from a risk perspective. I think this is one of those times. I have written about pensions, insurance companies, and hedge funds under extreme pressure to perform, whether because they have a liability stream to support or investors to satisfy. I believe they have disregarded risk because of this intense pressure to perform. I don't believe this is healthy for stock prices. And when it unwinds it is likely to be rapid.
Default rates may be in general low, but one reason is because 2001 and 2002 saw historically high rates of defaults. We live in a relative world and analysts make sure use of relativity.
The trailing P/E ratio for the SP500 is 19.5. Looking forward is pretty useless, but that is at 16.5. Stocks are not cheap by any measure. Normally as the year goes on, earning estimates come down.
It is always dangerous to try to predict the direction of the overall stock market for the reason that there are so many variables mixing in with each other.
Using one variable is the dangerous thing.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter