I’m in the sunny state of Hawaii, trying to replenish my Vitamin D for the rest of the winter (no, I’m not in Hawaii for the rest of winter, just to be clear!). Not that I want you to be jealous, but the weather will be 80 and sunny, and it should give me enough relaxation until we see the sun in Seattle! Is that July 5th?
Getting back to what’s really important, we have been talking about an inverted yield curve for the better part of three years (or more).
Today, the bond market is showing a “normal” yield curve. This is where short-term yields are lower than long-term yields. Here’s what it looks like.
Now, you get paid more for taking term risk. That is how long the term of the loan is, and this makes sense. The longer your investment, the more variables come into play (generally), and thus you should be compensated more. You can also see from the chart above that corporate yields are about 1% higher than treasuries. Not anything that is unexpected or that show “stress” in the economy. Let’s check out high-yield bond (“junk bond”) spreads.
Typically, you will see spreads widen when there appears to be trouble in the economy, and you usually see it first in high-yield spreads. The spread is the difference between the yield in one bond (the high-yield bond) and another (typically the relatively risk-free treasury bond). Here’s what it looks like today.
You can see that spreads are at the lower end of where they have been in the last five years. The last time they “blew out” was in 2020 (COVID). Today, things look normal, though many will point out that this is due in part by the “quality” of high-yield bonds improving as lower-rated bonds have been replaced by private credit.
We know that the stock market has been going up and down since the inauguration, and that has brought investors to a relatively neutral sentiment for stocks.
You can see we are close to the average, but quite a ways from the peak reading back in July. More importantly, we are only a few weeks from the 1-year bearish high in sentiment in the markets. So, things aren’t so bad.
If we look at the CNN Fear & Greed index we can see that it is more on the “fear” side of things.
Again, not far from the lows a month ago, but a long way from the 1-year highs.
Meanwhile, the Federal Reserve said that they would leave rates steady at their last meeting. There is only a 37% chance of another cut by May.
The Magnificent 7 as they are known have underperformed the S&P 500 equal-weight index this year by about 2/3rds of a percentage point. Not a lot, but we are early in the year. I would expect that to continue over the next months and possibly years. The small cap index has also outperformed the Mag 7, as has the midcap index by almost 1%.
MAG 7 2.3% Magnificent 7
RSP 3.0% S&P 500 Equal-weight
IJR 2.6% Small-cap index
MDY 3.1% Mid-cap index
Even Bitcoin is up, beating everything else, by double in some cases.
FBTC 5.7% Fidelity Wise Origin Bitcoin
No telling where things head from here, but this is a good start for those invested beyond the biggest companies that have garnered so much attention (and capital) in recent years. Headlines continue to fly at a dizzying pace, and we’re here to help you stay invested prudently through the noise.
That’s it for this week. If you have any questions, please reach out and we will be happy to have a conversation.