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Fortitude Private Wealth

High Yield Bonds and Looking Ahead

I often receive phone calls or emails with the question, “What do you think the market is going to do next?” I cannot provide a definite answer to that question, but I do look at many different indicators to help get a sense of where the market may be headed. One of the main research systems that I utilize is Technical Analysis. Technical Analysis uses chart patterns to identify the past price and volume of securities.  It helps me visualize where possible buy levels and sell levels may occur.

I also look at fundamentals and how different asset price movements may give an indication of what may be ahead for equity prices.

One asset class that I am monitoring closely is High Yield bonds. High Yield bond prices peaked several months before US equities in 2015 and have continued to lead the market lower since last April.  During the last 6 years, many companies have issued new bonds to buy-back company stock or to invest in new projects. The main driver of this was the zero interest rate policy that the Federal Reserve (FED) has had since 2009.

Below is a chart of the S&P 500 Index and US High Yield bond spreads. This chart illustrates how High Yield bond spreads or the interest rate on new issues of high yield bonds have increased and in turn, led stock prices lower. This chart also shows how US stock prices have declined to match the increase in high yield bond spreads during the past several recessions.

As a result, I think that High Yield bond prices may be a good forward looking indicator for when this current decline in stocks may end.

High Yield spreads

Source: Doubleline, J.P. Morgan

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in the presentation may not develop as predicted.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Investing involves risk including loss of principal. No strategy assures success or protects against loss.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

About Josh Zorger

Joshua D. Zorger is the founder of Fortitude Private Wealth and has more than 10 years of experience in the wealth management industry. In addition to holding the FINRA Series 7 and 66 securities registrations through LPL Financial, Joshua is a CERTIFIED FINANCIAL PLANNER™ practitioner.

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LPL Financial Certified Financial Planner Fortitude Private Wealth
600 E Carmel Drive, Ste #159
Carmel, IN 46032
Phone: 317-819-8550

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*No strategy assures success or protects against loss. Investing involves risk including loss of principal.