Leaders-Laggards

Over the weekend, it was looking like energy stocks would be the big winner in a U.S. strike on Iran. By Monday, risk had dissipated and the anticipated spike in energy prices fizzled out. Whether it’s a sign of underlying cautiousness or just a normalization of persistently high yields, the Treasury market is beginning to move higher. Junk bonds are facing a bit of a make-or-break moment.

Despite geopolitical risks, investors continue to remain confident that the U.S. economy is on the right path and that clears the path for risk taking. This is starting to look a lot like 2023 where the expected winners in an economic expansion scenario are languishing underperformers. Long bonds have been performing a little better and responding to conditions in a way we might more traditionally expect to see, but it’s been inconsistent at best.

Inflation has not spiked (yet) and stocks could continue pushing higher as long as the status quo is maintained and there aren’t any systemic shocks. Overall, there’s a durability with junk bonds that’s undeniable, even if I feel that credit risks aren’t being properly reflected. I’ve been intrigued by small-cap outperformance over the past few days.