You know what indicator I watch like a hawk? Credit spreads! There’s a very simple reason: Problems in the credit market usually PRECEDE problems in the equity market.
With that said, check out my MoneyShow Chart of the Day. This is from a slide in my presentation about markets at last week’s MoneyShow/TradersEXPO Las Vegas.
It shows the ICE BofA US High Yield Index Option-Adjusted Spread. It’s a mouthful, I know. But what it shows is the difference (aka “spread”) between yields on high-yield (or “junk”) bonds and yields on underlying US Treasuries.
Since junk bonds are inherently riskier than government bonds, junk bond investors demand extra yields above and beyond what US Treasuries pay. When they’re worried about credit risk, increased market volatility, or other problems, the amount of extra yield they demand goes up. Or in other words, spreads WIDEN.
Ever since the bank failure wave in early 2023, spreads haven’t been widening. They’ve been TIGHTENING.
The quote at the bottom of my slide notes that some of the move stems from President Trump’s election. That’s because the administration’s corporate tax policies are expected to be favorable for companies. But that’s only part of the story. Risk appetite has been rising for some time due to stronger earnings and expectations for a soft landing in the economy. That’s a bullish development for stocks.
Simply put: Until the credit market “goes” (spreads surge/“blow out”), more equity market gains should flow.
