This week's weakness has brought the S&P 500 back into negative territory for 2015 with just 13 trading days left in the year.
One of the primary catalysts to stocks being sold off this week is the drama unfolding in the high yield bond market. High yield credit spreads have continued to widen over the course of the year and we're seeing this spillover into the equity markets in the form of increased volatility. As the distress in the credit markets has grown and defaults mount, the equity markets are coming to the realization that such occurrences often coincide with recessionary periods. That risk coupled with the Fed's anticipated rate hike announcement next week has definitely shaken investor confidence.
The following charts and comments from JP Morgan show just how ominous this situation could become especially if it expands beyond the energy sector.
Further compounding the problems in the junk bond space is the much publicized trouble that certain funds are facing. Third Avenue Management has decided to liquidate one its high yield strategies (Third Avenue Focused Credit Fund) and will not allow investor withdrawals as this process unwinds. This announcement kicked up fear in other bond funds and as a result the iShares iBoxx High Yield Corporate ETF (HYG) had its worst one day performance since 2011 on Friday which caused it to close at its lowest price since July 2009.
All told, it simply was not a good week for price action or sentiment and we could very well have more volatility in store next week in the lead up to the Fed's announcement on the 16th. In fact, according to James DePorre of realmoney.com, tomorrow's action may require things to get a bit worse before they get better.
