When it comes to predicting the stock market, a good approach is to gauge the sentiment of bond investors. After all, they are mostly made-up of institutions and professional traders. Besides, bond investors are focused on determining credit risks.
So what is the bond market saying? Unfortunately, things are looking fairly bleak.
Perhaps the most problematic sign is the wreckage in the “junk” bond market. So far in August, total returns have averaged -5.1%. In fact, the spread between Treasuries and junk bonds are at 7.66%. This usually points to a recession. CEOs of mid-market companies — which generally rely on junk bond financing — likely will pull back on things.
Top-notch bond fund managers already are getting cautious. Look at Jeffrey Gundlach, who operates DoubleLine Capital. According to Bloomberg, he has been aggressively moving his portfolios into cash. He thinks it is a better option than corporate bonds.
The huge rally in the Treasury market also is another indication that the economy is vulnerable. After all, investors were unfazed about the S&P downgrade of the U.S. debt or the incredibly small yields. Even banks like Bank of New York Mellon (NYSE:BK) have resorted to charging fees for deposits.
Looking at the rest of the year, there definitely is plenty to be concerned about. The European sovereign debt situation is far from resolved, as seen by the continued bickering and conflicting messages. At the same time, there is likely to be drama when Congress’ “supercommittee” makes its decisions regarding the U.S. debt.
So for investors, it’s probably best to remain on the cautious side. As I’ve written recently, there are good values in high-yield dividend stocks like Procter & Gamble (NYSE:PG), Coca-Cola (NYSE:KO), AT&T (NYSE:T) and Chevron (NYSE:CVX)
Now, this is not to say these stocks will be “safe havens.” Actually, such a thing probably does not exist. But at least you’ll likely get more downside protection as well as a decent amount of income along the way.
Tom Taulli is the author of various books, including “All About Commodities.” He does not own a position in any of the stocks named here.
