Summary
- The JNK ETF didn't climb another leg when the S&P attacked the 4100 level last week, which in my book is an indication that the stock market is a bit ahead of itself.
- As we approach tomorrow's FOMC meeting, the Fed needs to be reminded that most of the economic consequences of the fastest rate-hiking cycle in history likely won't be felt until the summer.
- As we begin to feel the true impact of the Fed's latest round of rate hikes, I suspect the junk bond market will weaken somewhat, and that will have repercussions for stocks.
Halloween
A junk bond “looks like a bond, but trades like a stock,” a longtime veteran bond trader told me, and a total return chart of the SPDR Barclays High Yield Bond ETF (JNK) and the S&P 500 certainly proves it. The JNK ETF didn’t gain another leg when the S&P attacked the 4100 level last week, which in my book is an indication that the stock market is a bit ahead of itself. As long as the S&P 500 holds its 2023 lows (near 3800), this rally could go further, but not without support and filling.
The graphs are for illustration and discussion purposes only. Please read the important information at the end of this comment.
Some economic indicators more sensitive to interest rate hikes, such as industrial production, retail sales, PMIs, and housing statistics, have deteriorated sharply since the JNK and the S&P 500 bottomed out in mid-October, while others, such as weekly jobless claims, fell below 200,000 last week, a sign of a strong labor market. This manic-depressive nature of the economy, with some indicators pointing to a recession and others pointing to an accelerating economy, is a direct result of the COVID shutdown. Economies are not built to be shut down, and we are seeing the truly historic consequences.
The graphs are for illustration and discussion purposes only. Please read the important information at the end of this comment.
As we approach tomorrow's FOMC meeting, the Fed needs to be reminded that most of the economic consequences of the fastest rate-hiking cycle in history likely won't be felt until the summer. The Fed did what it has never done before: it pushed M2 money supply growth into negative territory (year-over-year), as I expected in this article ("M2 growth goes to zero"), and I don't believe M2 is just released, so I'm wondering what kind of records we'll see when all is said and done.
This horrible whiplash, where M2 grew (YOY) 26.9% in February 2021 and then was negative 1.3% YoY growth in December 2022, is projected by the Fed and Congress's $6 trillion COVID spending bill, aimed at preventing a second Great Depression. They succeeded in that regard, even if we are paying for it with higher inflation and the rapid rate hike that followed. But since M2 growth cannot change by a dime, I suspect inflation readings will be somewhat lower than most observers expect through the end of 2023, as the M2 contraction is underway. Therefore, the Fed should stop and think.
As we begin to feel the full impact of the Fed's latest round of rate hikes, I suspect the junk bond market will weaken somewhat, and this will have repercussions for stocks. I should also remind readers that February is the only month of the year with negative expected stock returns for extended periods. So far, January has been operating exactly on the seasonal schedule, so February could do the same.
Furthermore, it should not be underestimated that the new Russian offensive in Ukraine, expected to begin in late February, is likely more dangerous than the original invasion and has a high probability of spreading outside Ukraine, given the massive support for the Ukrainian government's army from the West. The imminent escalation is not priced in by the Western stock market, due to troop movements on the ground.
The graphs are for illustration and discussion purposes only. Please read the important information at the end of this comment.
Amid this misguided euphoria, the S&P 500 Volatility Index (VIX) hit a new 2023 low of 17.97 on Friday, highlighting investor complacency just when investors should be most concerned. The last time I highlighted this decline in the VIX, a few weeks ago, we saw a 130-point drop in the S&P in two days.
I think the same thing is coming again.
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Disclaimer: Click here for important information found in the “About” section of the Navellier & Associates profile that accompanies this article.
Editor's note: The summary points in this article were chosen by Seeking Alpha editors.
This article was written by
Ivan Martchev is an investment strategist at Navellier Private Client Group. Previously, Ivan was editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser's mutual fund newsletter and associate editor of the personal finance newsletter. Ivan is also the co-author of The Silk Road to Riches (Financial Times Press). The book provided an analysis of geopolitical issues and investment strategy in natural resources and emerging markets, with a focus on Asia. The book also correctly predicted the collapse of the US housing market, the rise of precious metals, and the resulting surge in investor interest in emerging markets. Ivan's commentary has been published by MSNBC, The Motley Fool, and others. Ivan is currently the weekly editor of Navellier's Market Mail and a contributor to Marketwatch.
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