The bond market is sending ominous signals that in the past have preceded declines in stocks, said David Rosenberg, chief investment strategist at Gluskin Sheff & Associates Inc.
High-yield or “junk” bonds have lost value this year, driving up yields and indicating investors are losing their appetite for riskier investments. Bond prices and yields move in opposite directions.
“If you think the equity market is heading for a spot of trouble here, the high-yield bond market is having a coronary,” Rosenberg said in
an August 13 report obtained by Newsmax Finance. “The average U.S. junk bond yield is now 7.3 percent, the highest since mid-December.”
The spread between junk-bond yields and safer Treasurys has widened by 100 basis points since June to 580. In the past,
that kind of rapid shift preceded a decline in the S&P 500 stock index of 9 percent, according to Rosenberg's research.
“Yet the stock market is off just over 2 percent, so either the S&P 500 has more downside from here or spreads are going to have to adjust by tightening back in,” he said. “If there is downside now, it is more in the equity market than it is in the credit market.”
While broader stock indexes have slid by 2 percent to 3 percent from recent highs, the market internals are showing signs of weakness, Rosenberg said.
“Two-thirds of the S&P 500
subsectors are down at least 5 percent from their nearby highs,” according to his report. “Nearly half are down 10 percent of more – that is half already in a correction.”
Rosenberg was labeled as a "perma-bear" before 2012, when the diminishing likelihood of another recession turned him bullish on stocks. Prior to joining Gluskin Sheff in 2009, he was chief North American economist at Merrill Lynch.
Rosenberg remains optimistic for stocks, saying any decline would be short-lived amid the bigger picture of long-term market trends.
“Be cautious near-term but with an eye to buy because the dust in corrective phases tends to settle in a matter or weeks or months,” Rosenberg said. “As we saw in 1984, 1987, 1994, 2005 and 2011, the S&P 500 can be flat for a year, riddled with corrective phases, and all in the context of secular bull phases.”