October gave income investors something to smile about.
The S&P 500 fell 0.9%, and the Nasdaq Composite dropped 5.3%. Anyone following only the biggest technology stocks could be forgiven for thinking the whole market had developed a serious problem.
Meanwhile, the equal weight S&P 500 gained 5%. Large company value stocks rose 4.4%, while growth stocks lost 6.1%. Nine of the 11 S&P sectors advanced, led by a 14% gain in energy.
Apparently, companies that produce actual cash still have a place in the investment universe. Someone should let the television experts know.
That rotation matters to us. The income universe includes businesses that move energy, collect interest, finance properties and distribute the cash their assets generate. Their prospects do not depend on investors remaining willing to pay almost any price for the latest exciting story.
November has supplied a reminder that broader participation does not eliminate volatility. The S&P 500 lost 2.7% in the week ended Nov. 6, while the Nasdaq fell 3.4%. We should enjoy improving recognition of value without confusing it with immunity from a market decline.
Our opportunity remains finding dependable income at prices that leave room for things to go wrong. The latest credit numbers help us judge how much room we need.
The following dashboard uses the latest available observations as of Nov. 9. Corporate spreads measure additional compensation over Treasurys, adjusted for embedded options. One percentage point equals 100 basis points.
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Credit indicator | Latest reading | Comparison | Observation date |
|---|---|---|---|
Broad high yield spread | 342 basis points | 343 on Nov. 2 | Nov. 6 |
AA corporate spread | 69 basis points | 71 on Nov. 2 | Nov. 6 |
BB corporate spread | 208 basis points | 206 on Nov. 2 | Nov. 6 |
Single B corporate spread | 361 basis points | 363 on Nov. 2 | Nov. 6 |
CCC and lower spread | 1,317 basis points | 1,319 on Nov. 2 | Nov. 6 |
Chicago Fed financial conditions index | Negative 0.459 | Negative 0.498 on Oct. 2 | Week ended Oct. 30 |
Sources: ICE BofA indexes and Chicago Fed data through FRED.
The broad market is functioning. High yield spreads remain below our 350 basis point caution reference and well below our 500 basis point crisis reference. AA spreads are not signaling a general scramble away from corporate credit.
Yet the weakest borrowers are paying dearly. CCC spreads stand at 13.17 percentage points over Treasurys, compared with just 2.08 points for BB borrowers.
Calling this an entirely comfortable credit environment would require ignoring a rather large part of the evidence.
My reading is caution because of the divergence, with no broad crisis signal.
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