a rapid realignment of markets after the u.s. presidential election has sent stocks in one direction and corporate bonds<u+00a0>in another, a particularly acute<u+00a0>divergence that is leading some investors to suggest<u+00a0>the current market action<u+00a0>may not last. the movements are most evident in smaller companies, some of which have junk credit ratings. the small-cap heavy russell 2000 index surged 8.7% since the election result, while the biggest junk-bond exchange-traded fund, the ishares iboxx $ high yield corporate bond etf , fell 2.2%. the divergence, a<u+00a0>reversal of recent market action, suggests stock investors are taking an optimistic view of donald trump <u+2019>s presidency, and the ability of his policies to filter through to corporate bond lines. bond investors, on the other hand, are<u+00a0>contending with the impact that rising rates will have<u+00a0>on borrowing costs. <u+201c>these are not sustainable trends,<u+201d> said peter boockvar, chief market analyst at the lindsey group. <u+201c>we<u+2019>re in a manic bipolar market here.<u+201d> another way to look at the relationship is through correlations, which measure the linkage<u+00a0>between two assets. a correlation of 1 means the two move by the same proportion in the same direction, while minus-1 suggests the same proportion in the opposite direction. zero signals no relationship. the 20-day rolling correlation between the russell 2000 and the junk-bond etf<u+00a0>was at minus-0.24<u+00a0>on monday, its lowest in about a year, after being as high as 0.94 a week<u+00a0>earlier, according to<u+00a0>factset and wsj market data group. the opposing movements are also visible, though less dramatic, among typically larger<u+00a0>companies. the s&p 500 is up 1.2% since last tuesday, while the ishares iboxx $ investment grade corporate bond etf has fallen 2.5%. but the yield on the 10-year treasury note has climbed more<u+00a0>than one-third of a percentage point since the election, which means higher borrowing costs for companies that issue fixed-rate long-term<u+00a0>debt. to be sure, most<u+00a0>of the selloff in corporate bonds hasn<u+2019>t been driven by<u+00a0>concerns about credit quality. the premium that investors demand to own junk bonds over super-safe u.s. treasurys hasn<u+2019>t moved much since the election, according to index data from bank of america merrill lynch. all<u+00a0>of this raises questions about how much further stocks can keep rising. j.p. morgan analysts, for example, suggested in a<u+00a0>monday<u+00a0>note that<u+00a0>rising rates could constrain stocks. many investors already had considered stock prices to be high<u+00a0>relative to earnings, even before rates began rising. <u+201c>anyone who was arguing that the stock market was cheap was looking at it through the lens of bonds,<u+201d> said jack ablin, chief investment officer at bmo private bank. <u+201c>through most fundamental measures stocks look expensive. the problem is that now that bonds are getting more competitive, that valuation advantage that stocks have is diminishing. it<u+2019>s one of those rubber bands that<u+2019>s going to stretch and stretch until it snaps.<u+201d>
junk bonds sound an alarm in stocks - wsj
ben eisen