Do Bond Investors Know Something That Stock Investors Don't?
Today marks the end of the seventh straight week of stock market gains since the market low on March 6th. What an amazing run of positive market performance. I must admit that it is difficult to see how the market is worth 30% more today than it was just seven weeks ago.
The corporate bond market, on the other hand, has not shown the same excitement over the last seven weeks. While corporate bond spreads have narrowed, indicating that bond investors are less concerned about further failures of corporations that issue debt, corporate bonds remain high and have not contracted in the way they should with a fundamentally sound stock market rally of 30%.
Over the past seven weeks, the fundamental changes that have occurred in the economy of the United States. The TARP, TALF, PPIP and other government programs have been announced but large questions remain about their success and even the probability of success. We know that the bank stress tests have occurred and that the government is committed to standing behind the remaining banks—unfortunately the recent announcements have created more questions than they have answered. It is spring and there is a history of positive performance in the stock market during springtime…
Perhaps the largest change is the sentiment of market participants. In January and February, there was a sense that the market was never going to get better, companies were going to cease being profitable forever and that market participants were walking away as fast as they could. This was evidenced by market outflows and hedge fund liquidation data.
This recent rally seems to be the not-going-out-of-business rally. Now that we have passed through the phase of, “thank goodness these companies aren’t going out of business…” the market now has to decide which businesses are going to be profitable during the early stage of this next business cycle.
This evaluation phase of the recovery can be painful for some investors and exhilarating for others. The determining factor is the success or failure of specific holdings. As consolidation occurs in the markets, the market drifts sideways for a prolonged period of time. Some companies accelerate growth by taking market share from other companies that will decline in value.
Evaluate well the stocks and companies you own….
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