WARNING SIGNS FROM HIGH YIELD CREDIT AND INTERNATIONAL MARKETS

High Yield Credit, Equities and International markets all moved higher in the first quarter of the year but Credit and International markets may be flashing warning signs of trouble to come.

It was just 90 days ago that we were commenting on the record levels of volatility and little progress investors had been subjected to in the second half of 2011. In our “Oh Trend…Where For Art Thou” comments published in December we stated:

Long periods of sideways volatility creates pent up frustration for investors. Once a trend emerges, the inevitable missing the boatmentality takes over and investors rush into the new direction giving fuel and momentum to the new emerging trend…U.S. markets are coiled right under the 200 day moving average once again, and look spring loaded for a large move.”

Spring loaded it was. The S&P 500 Index gained +12% percent from January through March, its best first quarter since 1998. High Yield Credit and International markets also participated delivering strong gains in lock step with U.S. Equities, confirming the broad nature of the move.

Anchor Capital Alternative strategies benefited from the positive climate of the first quarter. Both Alpha Trend Strategies and Alternative Income delivered on their objectives of positive returns with less than market volatility, gaining +7.1% and +2.0% respectively.1

 

It’s Time to Pay Attention

The spectacular first quarter rally is being largely attributed to the EU’s efforts to contain the ongoing European credit crisis, specifically through the LTRO. But as investors celebrate a record quarter, High Yield Credit and International markets are beginning to de-risk. When the S&P 500 index gained another +3.3% in March 2012, the SPDR Barclays High Yield ETF- JNK fell -1.2%, and the MSCI EAFE Index declined -0.9% in March, and is now -4.0% in the first two weeks of April.

 

S&P 500 Index vs High Yield Credit

High Yield Credit and S&P 500 Diverge

 

After such a substantial rally minor pull backs are to be expected and are quite important to sustaining market up-trends. But when credit and equity markets are diverging, it’s time to pay attention. With the first quarter now in the books, our focus is squarely on the discussions of additional QE and the end of Operation Twist.

 

 

1There is no guarantee the strategy will achieve its absolute return and reduced volatility objectives. Results are presented based upon a composite of separately managed accounts prepared according to accepted industry performance presentation standards. Results reflect the reinvestment of dividends and other account earnings, and are net of account transaction and/or custodial charges, the maximum investment management fee that would have been charged by Anchor during the corresponding time period, and any separate fees assessed directly by each unaffiliated mutual fund or exchange traded fund that comprised each portfolio. Please see complete performance results disclosures included in Anchor Capital strategy information.