The US continued to show a clean pair of heals to the rest of the world’s equity markets with the Standard & Poors 500 index (SPX) registering a new all-time high yesterday at 3389.78 points, up 49% from the March 16 low.
Meanwhile the technology heavy Nasdaq 100 index made an all-time high back in June and yesterday continued its march, also recording a new high. The index has delivered a 65% return since March.
European shares are still 15% below all-time highs, emerging markets are 17% below their peaks, while China’s Shanghai Composite is some 44% below the highs.
CREDIT SPREADS NOT SUPPORTIVE OF FURTHER GAINS
The huge monetary stimulus provided by the Federal Reserve helped to steady nerves in the face of the biggest healthcare crisis since the Spanish Flu outbreak 100 years ago. The central bank took the unprecedented step of committing to buy the weakest corporate bonds, so called junk bonds for the first time.
Companies with weak balance sheets have to pay investors a higher rate of interest than those with strong balance sheets to compensate them for the higher risk that the debt will not be repaid.
The spread between the lowest grade corporate debt and the highest is considered to be a good indicator of the risk appetite of bond investors.
The spread tightened from 4.5% in March to around 1.5% today indicating a strong risk appetite among bond investors. The narrowing has moved in lock-step with the rise in US stocks. However over the last month the spread has stopped falling while the S&P and Nasdaq continued their moves higher, putting a question mark over further gains.
The thinking is that if bond investors have become more circumspect or less enthusiastic about the relative attractions of the weakest companies, the implied lowering in risk appetite should eventually impact equity investors.
However for the time being investors in US stocks appear entranced by technology companies and ultra-low interest rates, which they see as supportive of higher stock valuations.
