Will Credit Lead Equities?

By Jim Dondero | August 17, 2015

  • Stocks were up nicely last week, with the broad market averages advancing nearly 1%. More importantly, the bulls successfully defended key areas of support such as 2,050 on the S&P 500 and 1,200 on the Russell 2000. Our point being, it appears to us as if stocks may have a good chance to post further gains from here.
  • That being said, credit markets continue to tighten which could limit the potential upside for equities. The outlook for High Yield remains particularly concerning given the weakness in the energy sector. Technically speaking, support levels from December 2014 are now being tested while the Treasury curve continues to flatten.
  • Emerging markets are closely related to high yield bonds as both are highly dependent on global growth. While the general outlook within the BRIC’s remains mixed, Chinese ETFs such as FXI and ASHR are now testing key areas of support. As with the US market, we believe the bull’s best chance to push the market higher is now.
  • At the center of this all, has of course been crude oil. Down another 20% over the last month, crude has become quite oversold and may finally be setting up for a decent bounce. Should the bounce occur, it should serve as a catalyst for a move higher in both stocks, and in particular, high-yield bonds.