By Graham Summers, MBA
One of my favorite leading indicators is high yield credit or junk bonds.
Junk bond investors are extremely sensitive to macro changes. The reason for this is that they are investing in an asset class that has a high likelihood of default. As a result of this, these investors need to be extremely attuned to any changes in the economy/ fundamentals because failing to do so can result in losing most if not all of their money.
For this reason, high yield credit tends to lead the stock market. I say “tends” because nothing in investing is flawless. But this indicator is about as good as it gets.
Case in point, during the recent tariff tantrum, stocks (black line) collapsed while high yield credit (red line) held up beautifully. This was a clear signal that a prolonged tariff war was unlikely or… that it would have minimal damage to the U.S. economy.
Sure enough… the tariff war was postponed by 30 days and stocks bounced hard. High yield credit was correct once again! And since that time, high yield credit is suggesting that new all-time highs are coming shortly. Consider that a “freebie” in terms of stocks insights.
This is just one of the signals I use to take advantage of mispricing in stocks. Feel free to add it to your arsenal!
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Best Regards
Graham Summers, MBA
Chief Market Strategist
Phoenix Capital Research
