High-yield Funds Lead the Stock Market?
April 8, 2010 • Posted in Economic Indicators
A reader asked: “According to ‘Technical Tuesday: A High-Yield Leading Indicator?’, high-yield funds are leading indicators of some sort. Could you take a look?” The high-yield funds cited in the referenced item are Putnam High Yield A (PHIGX) and Fidelity High Income (SPHIX). Using weekly dividend-adjusted prices of these two funds and the S&P 500 Index from late November 1994 (limited by SPHIX inception date) through March 2009 (801 weeks), we find that:
The following chart plots the correlations over the entire sample period between weekly returns of both PHIGX and SPHIX and the S&P 500 Index for lead-lag relationships ranging from the S&P 500 Index leads the funds by 13 weeks (-13) to the funds lead the index by 13 weeks (13). The strongest relationship by far is positive and coincident (0). The positive correlations for -6 to -1 indicate some tendency for the broad stock market to lead high-yield funds by a few weeks. There is no evidence that high-yield funds lead the broad stock market.
Are results different for different subperiods?
The next chart plots the correlations between weekly returns of SPHIX and the S&P 500 Index for the same range of lead-lag relationships over two equal subperiods (break point about the beginning of August 2002). Results are similar for the first and second halves of the sample period, again indicating that the overall stock market may have some tendency to lead high-yield fund by a few weeks, but not vice versa.
In summary, evidence from simple tests does not support a belief that high-yield funds lead the broad U.S. stock market. There is some evidence of the converse.
A possible interpretation is that some part(s) of the stock market is more sensitive to interest rates than high-yield funds.