The Daily Prophet: Equities Are Quickly Running Out of Momentum
On the surface, it all looks pretty good for equities. The Dow Jones Industrial Average, S&P 500 Index and Nasdaq Composite Index continue to creep higher to new records. It's some of the more specialized indexes that are starting to send some worrisome signals.
Take the Dow Jones Transportation Average, which is loaded with railroads and airlines, and is sometimes called the market's early warning system. The gauge has broken with the more widely followed Dow Jones Industrial Average, falling 4.06 percent from its high this year on Oct. 12. Then there's the S&P 500 High Beta Index, which tends to lose momentum faster than the broader market at the tail end of an uptrend. That gauge is essentially flat since mid-October. Finally, the S&P 500 Momentum U.S. Dollar Index had its biggest drop in three weeks on Wednesday. Some strategists say that for equities to continue their rally, there would need to be substantial progress in Washington on tax cuts to justify their lofty valuations. The news, though, seems to be going against the stock bulls.
The Washington Post reported late Tuesday that Senate tax writers were considering a one-year delay in implementing a 20 percent corporate rate, down from the current 35 percent. In an interview with Bloomberg TV on Wednesday, Treasury Secretary Steven Mnuchin said he isn’t ruling out delaying the start of the corporate tax rate cut, but emphasized the administration’s “strong preference” is for it to take effect in 2018.
JUNK BONDS ARE LOOKING UGLY
There's another market that's also considered an early-warning system, and it's sending the same signals as the transports. By one measure, corporate junk bonds had their worst day in two months as yield spreads blew out by 5.5 basis points, according to Bloomberg News' Sebastian Boyd. What started as weakness in sectors such as communications and consumer non-cyclicals quickly turned into a market-wide selloff. The bonds of energy companies were some of the other big losers. Boyd reports that there is an accumulation of bad news around some of the biggest names in the market, and investors seem to be selling first and asking questions later. It probably wouldn't take much for the junk bond market to suffer sustained losses. Concerns have been rising for some time about higher leverage ratios, especially with the Federal Reserve not backing down from its plan to keep boosting interest rates. The market for junk-related debt has long since ceased to be a niche, and few could even argue that it's now a threat to the financial system. S&P Global Ratings estimates there was almost $2.47 trillion of U.S. corporate debt rated below investment as of June 30. Of that amount, about $1.5 trillion is scheduled to mature through 2022, creating rollover risk.