A Passing of the Baton From Lower Rated Companies to Higher

Over the last several months we have seen a dramatic market move back to more smart values. But for a moment let’s look a bit deeper and see actually what has happened.

If we classify stocks by their bond ratings, BBB being a lower rated and less financially sound companies, and AAA being a stronger, more stable, financial companies, we find an interesting phenomenon has happened, (this is a repeat of the 2002-2003 market movement).  Lower rated companies have moved up much faster over the last several months, much greater than the higher ranked, more stable companies.

Why is this?

During an economic downturn many of the weaker companies are priced as if they will go bankrupt and have extremely negative valuations. As the light possibly gleams at the end of the tunnel, Armageddon price valuations come off the table and some of these stocks have extreme price movements of 100 to 200%. (We are not recommending these companies nor do we own these type of companies on a regular basis, we are only analyzing the facts.)  

So to use less Wall Street lingo and more main street, the weak lead the charge to this point in the recovery. 

So What is Next?

The Baton will hopefully be handed over to the strong, from the near failing, and market movements become based more on fundamentals. We will be watching this movement as another sign that the recovery is maturing. Of course anything can happen, and while the economy may no longer have the flu, we still most certainly have a cold.  JK

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