Jeffrey Gundlach called it on risky link between stocks and junk bonds

DoubleLine Capital co-founder takes to Twitter to express his validation as FAANGs fall

Nov 10, 2017 @ 11:00 am

By Bloomberg News

Jeffrey Gundlach has been warning something's got to give. Based on the past two days, looks like we have our answer.

Stocks fell around the world a second day and high-yield bonds headed for a fourth straight loss, resuming a historic correlation that the hedge fund manager on Wednesday had warned was alarmingly out of whack.

"JNK ETF down six days in a row, closing near its seven month low," the DoubleLine Capital co-founder wrote on Twitter Wednesday. "SPX up five of last six days, closing at an all time high. Which is right?"

With high-yield bonds and the tech-heavy index of Nasdaq 100 stocks moving in tandem for most of their history, a recent breakdown in correlation suggests the selloff gripping junk is set to spread further. True to Gundlach's warning, Facebook, Amazon, Apple, Netflix and Google owner Alphabet – collectively known as the FAANGs – are tumbling too.

As prospects for meaningful U.S. fiscal reform faded Thursday, the Nasdaq 100 fell 0.5% while the Bloomberg Barclays US Corporate High Yield Bond Index fell 0.4% to its lowest point in nearly two months. Previously, the mega-cap index had gained 1.5% since the start of the month while the high yield index fell 0.4?%.

"A material pullback would be something we need to watch for, as a deteriorating credit market has led each of the largest equity pullbacks since 2014," said Frank Cappelleri, a senior equity trader and market technician at Instinet. "With divergences once again apparent now, the bulls face their latest test."

Though one day of trading doesn't make for a trend, that they both declined was an ominous sign that junk bonds may pull down equities further. Leading up to Thursday, one-month correlations between the Nasdaq 100 and SPDR Bloomberg Barclays High Yield Bond ETF, ticker JNK, had reached its lowest level since 2014.

In the past decade, there were only three other instances where the relationship between JNK and mega-cap tech broke down to this degree. Each time, the two assets began to resume their positive correlation within four to 12 days, data compiled by Bloomberg show.

As for Gundlach, he took to Twitter Thursday to express his validation.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

InvestmentNews celebrates diversity & inclusion in the financial advice business

Highlights of the Excellence in D&I Awards, showcasing the achievements of 26 individuals and firms that are moving the needle when it comes to diversity and inclusion.

Latest news & opinion

Don't be fooled by the numbers — the industry is in a dangerously vulnerable state

Last year's stock market gains helped advisers turn in solid growth in assets and revenue, but that growth could disappear in the next market downturn.

Divided we stand: How financial advisers view President Trump

InvestmentNews poll finds 49.2% approve of his performance, while 46.7% disapprove. How has that changed over the course of his presidency?

10 states with the most college student debt

Residents of these states have the most student debt when you consider their job opportunities.

Ex-Wells Fargo brokers sue for damages, claiming they lost business in wake of scandals

In a Finra arbitration complaint, two brokers allege that Wells Fargo's problems damaged their business.

Invesco to buy OppenheimerFunds

Deal brings Invesco another $246 billion in assets, as well as high-fee actively managed funds.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print