Weekly Market Commentary Sept.14, 2015

The Dow Jones Industrial Average finished the week up 331 points, adding 2.1% to close at 16,433. The S&P 500 Index gained 40 points, up 2.1% to end the week at 1,961.  

The Nasdaq Composite advanced 3.0% to close at 4,822. The S&P MidCap 400 Index closed the week at 1,414, up 2.0%. The Russell 2000 ended the week up 1.9% at 1,158.  

The MSCI ETF "EFA", the proxy for developed international equity markets, rose 3.2% for the week. Emerging markets, as represented by the MSCI ETF "EEM", bounced back from last week's loss with a 4.1% gain.  Domestic high-yield corporate bonds gained 0.5% for the week, as measured by the Bank of America Merrill Lynch US High Yield Master II Index.  

Volume was light and volatility remained elevated as stocks fluctuated over the holiday-shortened week but failed to make significant headway in either direction.  The yield on the benchmark 10-year US Treasury note rose to 2.18%.  Oil prices declined to $45.16 for West Texas Intermediate (WTI) and $48.70 for Brent Crude.  Goldman Sachs issued revised oil price projections through 2016, with median projections indicating that WTI will still be at $45 a barrel 12 months out and a worst case estimate of $20 a barrel, noting that production has not declined fast enough to resolve the massive oversupply.    

For the second consecutive week, there was no new highyield debt issued in the primary market.  High-yield bond issuance has dropped off significantly since mid-August and now stands at $205.6 billion year-to-date, 3% lower than the same period in 2014.  Investors cautiously returned to highyield funds, which reported a net inflow of $186 million for the weekly period ended September 9th.  The Effective Yield on the Bank of America Merrill Lynch High Yield Master II index declined slightly for the week, to 7.22% as of September 10th, down from 7.3% a week prior.  The OptionAdjusted Spread (OAS) over the risk-free Treasury rate was 5.58%.        

The OAS of highly speculative CCC-rated bonds is currently 11.35%, 7.58% greater than that of BB-rated debt, considered the least risky of the high-yield rating tiers.    

This spread stood at 6.38% at the beginning of the year, so investors seem to be demanding a greater relative risk premium for the lower rated, riskier debt.  High-yield markets are clearly flashing warning signs despite a relatively low rate of defaults, which have thus far been contained to energy and mining companies.  The Moody's high-yield bond Covenant Quality Index (CQI), which tracks the quality of investor protection mechanisms embedded in high-yield bond transactions on a rolling 3-month basis, weakened to 4.53 in August, a new record low.  The CQI measures bond covenant quality on a five point scale, with 1.0 denoting the strongest level of investor protection and 5.0 being the weakest.  Of the bonds issued in August, 29% were considered "covenant-lite", a term used when the bond indenture lacks traditional investor protection clauses, therefore making the bond issuance more risky to the investor.    

In US economic news, inflation remains muted in advance of next week's Federal Open Market Committee (FOMC) meeting.  The August producer-price index (PPI) was unchanged after rising 0.2% in July.  The Labor Department's Job Openings and Labor Turnover Survey (JOLTS) showed a spike in job openings from 5.323 million in June to 5.753 million in July.  The rate of workers quitting their jobs, an indicator of worker confidence, was unchanged for a fourth consecutive month at 1.9%.  The rise in job openings is indicative of tightening in the labor market, and will likely be cited by hawkish FOMC members in next week's meeting.  Consumer sentiment data, however, may give the Fed reason to pause.  The preliminary September flash index fell sharply from 91.9 to 85.7, the lowest level in nearly a year.  New York Fed President William Dudley singled out this report as an early indicator of the effect of Chinese stock market turbulence on US consumers.  Weekly jobless claims fell 6,000 to 275,000 for the week ended September 5th.  The less-volatile four-week moving average rose slightly to 275,750.  Continuing claims, reported on a one-week lag, rose 1,000 to 2.260 million.