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The Daily Prophet: Stock Bulls Should Give Thanks to Junk Bonds

Connecting the dots in global markets.

The S&P 500 Index topped 2,600 for the time on Tuesday before closing just shy of that level, and everything from emerging-markets to commodities and even long-term government debt securities joined in the good times. Those looking for a reason behind the broad-based rally could do a lot worse than crediting junk bonds.

There was a lot of handwringing as the Bloomberg Barclays U.S. Corporate High Yield Index fell 1.3 percent between Nov. 6 and Nov. 15. Although that isn't much in a historical context, it was enough to spark concerns that a long-predicted selloff had finally arrived. But since then, the index has recovered more than half its losses and no one this week seems to be talking about canaries in coal mines or early-warning systems or cracks in the markets. Investors jumped back into exchange-traded funds that hold junk bonds on Monday, pumping $371 million of new money into them, data compiled by Bloomberg show. Dollar funds led gains, with BlackRock Inc.’s $19 billion HYG ETF posting its biggest inflow in almost seven weeks, according to Bloomberg News' Natasha Doff. The amount likely continued to pour in Tuesday, as yield spreads continued to tighten on optimism for stronger corporate earnings and an economy that seems to be expanding no matter where you look.

Moody's Investors Service said this week that its Liquidity-Stress Indicator fell to a record 2.7 percent in October, and is tracking even lower this month. That suggests corporate borrowers are having little trouble meeting debt obligations. “Speculative-grade liquidity continues to improve due to strong credit markets, the recovery in oil and gas, and a growing US economy that is bolstering corporate earnings and cash flow,” Moody’s Senior Vice President John Puchalla said in a research note. “The declining LSI presages a lower (U.S.) speculative-grade default rate, which we forecast will fall to 2.1 percent in October 2018 from 3.2 percent today.”

Rather than pull back in response to weakness in credit markets, Goldman Sachs, UBS and BMO Capital Markets have all raised their forecasts for the S&P 500 in recent days. The equity advance that started in 2009 is likely to last three more years, driven by “rational exuberance” that hinges on profit growth, Goldman Sachs strategist David Kostin said. If that happens, the bull market would exceed the 10-year run during the internet frenzy as the longest in history, Bloomberg News' Lu Wang reports. Kostin increased his 2018 target for the S&P 500 to 2,850 from 2,500. BMO Chief Investment Strategist Brian Belski forecasts the S&P 500 will end 2018 at 2,950, just topping the 2,900 target UBS AG’s Keith Parker issued last week. The bears are trying to draw comparisons between today’s bull market and that of the late 1990s, but the market's breadth suggests the link may be unwarranted, according to Bloomberg News' Sarah Ponczek. More than 70 percent of S&P 500 members are rising, analysts at Strategas Research Partners wrote in a note Tuesday. That wasn’t the case in 1999, when less than half of S&P 500 members advanced. In 2007, before the crisis, just 50 percent of stocks ended the year higher.