The investment playbook that seeks solid return without piling into stocks has continued this past week.
Before we analyze, here’s how money moved around the globe this week, according to Bank of America Global Research’s fund manager survey:
- Stocks: +$100 million
- Bonds: +$16.7 billion
- Government Bonds: -$500 million (that’s an outflow)
- High-Yield Bonds: +$1.7 billion
- Investment Grade Bonds: +$11.2 billion
- Treasury Inflation Protected Securities: +$1 billion
- Cash: -$8.6 billion
Stocks rose this week, with the S&P 500 up about 2.9%, on the back of big tech stocks which continue to ride the stay-at-home wave. That’s helped companies like growth software giant Salesforce (CRM) - Get salesforce.com, inc. Report, which rose 25% after earnings and now has a market cap of $240 billion. Value stocks, including cyclical sectors, rose, but not as much as growth did. The worst of the earnings decline is clearly behind the market, excluding another March-like round of lockdowns. Market breadth is improving, meaning more stocks are participating in the rally. Stocks on the rise outnumbered falling stocks by a 3-2 ratio by midday Friday, according to a NYSE stat cited by Gorilla Trades strategist Ken Berman.
And the Federal Reserve said Thursday its new policy position is to let inflation average 2% over time, implying it will allow inflation to run higher than that at some points. Of course, 2% inflation was hard to come by even before the pandemic. The announcement juiced equities, even though the federal funds rate is already at 0% and can’t fall from there unless the Fed wants to go negative, which it likely doesn’t want. The market has been well aware that the Fed is providing as much liquidity to the markets and the banking system as possible, but some investors see no choice other than to buy stocks.
Treasury yields were already reflecting that benchmark lending rate and were below the recent inflation rate, so the highly inflationary policy -- in theory -- caused the yield to rise. As seen by Bank of America’s data, there was minimal investor interest in the bond this week. Yields rise when prices fall. The 10-Year treasury yield is now above 0.7%.
As for global stocks, the MSCI World Index IDX rose 2.4%.
The net inflow into investment grade bonds marked the 21st consecutive week of large inflows. High yield has garnered a similar level of interest as well. This week, the share price of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) - Get iShares iBoxx $ High Yield Corporate Bond ETF Report rose 0.5%, while its investment grade etf counterpart fell.
But over the past 3 months, BofA says, $182 billion has moved into corporate bonds, as investors have pulled $97 billion out of their previously-large cash funds built during the start of the pandemic. If investors were to sustain that rate of bond inflows for a year, the flow would be almost $730 billion. In those 3 months, corporate bond prices have tapped into their upside, with the price of the aforementioned high yield etf up 3.3%. That’s certainly not the 14% gain on the S&P 500, but the gain in stocks in untrusted by many market participants. With rates unable to fall from here and corporations already finished with much of their borrowing and liquidity needs for the year, a rebound in employment and consumer spend hinges on the new fiscal stimulus bill that won’t be finalized until at least September. Meanwhile, small businesses in states not fully reopened are starved for cash.
Sure, while blowout second-quarter earnings across sectors have given stock investors the all-clear on the path to a strong earnings rebound in 2021, the upward slope of that path is highly uncertain, especially if a third wave of virus infections hits the globe when the weather gets cold. And sure, companies with solid balance sheets will most likely weather that storm again, but there is still a lot of potential for wild share price volatility.
Several bond fund managers TheStreet has spoken with have said many investors have found a safer version of solid real return in high yield and investment grade corporate bonds, which began the summer at spreads of around 6.5% and 4.6%, respectively. Those spreads are the yield minus the 10-Year treasury yield. The wider the spread, the more attractive the price, which was reflecting high uncertainty on corporate credit. Now, those spreads are reverting towards historical norms, as they are now 4.9% and 3.4%. Most companies, even some in distress, have strong access to the credit market and the Fed is keeping yields low using its asset purchasing programs up and down the risk ladder of the bond market. So while stocks may be volatile, the income and relatively calmer price movements of corporate bonds are providing a place of shelter for investors.