Bear Market for Activist-Linked Stocks Shows Tie to Bond Slump
S&P index of targeted companies falls 30% from 2015 peak
Marketfield’s Shaoul cites higher debt cost for stock buybacks
By David Wilson
(Bloomberg) – Trading in U.S. companies dealing with activist investors shows that weakness in the corporate-bond market has seeped into stocks, according to Michael Shaoul, chief executive officer of Marketfield Asset Management LLC.
The chart below tracks the Standard & Poor’s Activist Index, an indicator that Shaoul cited yesterday in a report. Companies in the index were targeted in the past 24 months by investors owning at least a 5 percent stake. All of them are also in S&P’s U.S. Broad Market Index, displayed for comparison.
Stocks targeted by activists are in a bear market. Through Jan. 6, their S&P index fell 30 percent from last year’s high, reached on June 23. The S&P 500 lost only 6.3 percent in the same period.
These companies were among the most active issuers of corporate bonds for the past few quarters, Shaoul wrote, because they were “coerced by the wave of activist investing into aggressive corporate buybacks.”
Many of them have the lowest investment-grade credit ratings, a segment of the bond market that slumped along with high-yield debt. The average yield on corporate notes and bonds rated Baa climbed as high as 5.54 percent last week from a low of 4.29 percent on Jan. 30, based on an index compiled by Moody’s Investors Service. Higher yields mean lower prices for the securities.
Sustained weakness in investment-grade debt “is the best reason to be skeptical about U.S. equity investment opportunities,” the New York-based strategist wrote. “Credit markets need to indicate a much healthier tone in order for the sloppy, violent range-bound equity market to be resolved to the upside.”