Gundlach's Stock Market Warning Comes TrueBy
Deteriorating junk bonds threaten equity-market darlings
Correlation had reached most negative level in three years
Jeffrey Gundlach has been warning something’s got to give. Based on the past two days, looks like we have our answer.
Stocks fell around the world a second day and high-yield bonds headed for a fourth straight loss, resuming a historic correlation that the hedge fund manager on Wednesday had warned was alarmingly out of whack.
“JNK ETF down six days in a row, closing near its seven month low,” the DoubleLine Capital LP co-founder wrote on Twitter Wednesday. “SPX up five of last six days, closing at an all time high. Which is right?”
With high-yield bonds and the tech-heavy index of Nasdaq 100 stocks moving in tandem for most of their history, a recent breakdown in correlation suggests the selloff gripping junk is set to spread farther. True to Gundlach’s warning, Facebook Inc., Amazon.com Inc., Apple Inc., Netflix Inc. and Google owner Alphabet Inc. -- collectively known as the FAANGs -- are tumbling too.
As prospects for meaningful U.S. fiscal reform faded Thursday, the Nasdaq 100 fell 0.5 percent while the Bloomberg Barclays US Corporate High Yield Bond Index fell 0.4 percent to its lowest point in nearly two months. Previously, the mega-cap index had gained 1.5 percent since the start of the month while the high yield index fell 0.4 percent.
“A material pullback would be something we need to watch for, as a deteriorating credit market has led each of the largest equity pullbacks since 2014,” said Frank Cappelleri, a senior equity trader and market technician at Instinet LLC. “With divergences once again apparent now, the bulls face their latest test.”
Though one day of trading doesn’t make for a trend, that they both declined was an ominous sign that junk bonds may pull down equities further. Leading up to Thursday, one-month correlations between the Nasdaq 100 and SPDR Bloomberg Barclays High Yield Bond ETF, ticker JNK, had reached its lowest level since 2014.
In the past decade, there were only three other instances where the relationship between JNK and mega-cap tech broke down to this degree. Each time, the two assets began to resume their positive correlation within four to 12 days, data compiled by Bloomberg show.
As for Gundlach, he took to Twitter Thursday to express his validation.