Credit market alarm bells signal the stock market’s in “growth scare” mode

How can you tell when a stock market sell-off is getting really worrisome?

Well, in our view, it’s when the credit market starts to go a little pear-shaped.

That’s what’s happening now. Even with today’s 2% decline in the S&P 500, the benchmark US stock index is still above its lows of the year. On the other hand, high yield credit spreads — a measure of how risky junk bonds are compared to US Treasuries — are at their wides of the year.

Back in late February, the seeming complacency of high-yield spreads amid the stock market’s tumble was a signal that so far, the downdraft in stocks was more a function of a momentum unwind than a reflection of a sharp deterioration in the US growth outlook.

Now, tariffs are darkening the already dimming backdrop for economic activity and their imprint is much more visible in credit and stocks, with tariff-sensitive stocks underperforming on the day and this week, and the likes of General Motors getting crushed. Even with the tech heavyweights leading the way down on Friday, it seems clear we’re now in growth scare mode.