More proof that US stocks are suffering from a momentum unwind, not a growth scare
When the credit market worries, the stock market should lose its mind.
Mercifully... that isn’t what appears to be going on right now.
A lot of digital ink has been spilled over the recent return to a negative correlation between stocks and bonds: the idea that, as stocks have been falling, bonds have been gaining in value, helping cushion the blow in balanced portfolios.
That’s the opposite of what was happening when the market was freaked out over high inflation.
Less talked about has been how the credit market (composed of corporate debt) has been reacting to the sharp gains in bonds.
Bond rallies can mean that investors are getting very concerned about how the economy will evolve. If you’re getting more worried about the economy, you’re also probably getting more worried about the ability of Corporate America to make good on its obligations, particularly riskier companies.
But the correlation between the daily returns of the iShares 20+ Year Treasury Bond ETF and iShares Interest Rate Hedged High Yield Bond ETF over the past month has been almost nothing. That is to say, as long-term bonds have rallied, credit spreads haven’t widened too much. Compare that to what transpired last August during the market panic as the unemployment rate was climbing: bonds rallied briskly and spreads widened aggressively, sparking a deeply negative correlation between the two assets.
(To get specific, my preferred alarm bell metric to monitor from a past life is two-year BB spreads, since BB’s are the least junky junk-rated bonds, and the maturity gets straight to the heart of near-term concern or a lack thereof.)
This isn’t necessarily cause for comfort. On the contrary, the credit market not pricing in major growth worries now means there’s more scope for the stock market to price them in later, in the event that spreads do widen from here.
But in diagnosing what’s going on right now, the credit market offers a helpful point of corroboration that the US stock market sell-off is more of a momentum unwind than an expression of deep unease about the economy.
That’s the opposite of what was happening when the market was freaked out over high inflation.
Less talked about has been how the credit market (composed of corporate debt) has been reacting to the sharp gains in bonds.
Bond rallies can mean that investors are getting very concerned about how the economy will evolve. If you’re getting more worried about the economy, you’re also probably getting more worried about the ability of Corporate America to make good on its obligations, particularly riskier companies.
But the correlation between the daily returns of the iShares 20+ Year Treasury Bond ETF and iShares Interest Rate Hedged High Yield Bond ETF over the past month has been almost nothing. That is to say, as long-term bonds have rallied, credit spreads haven’t widened too much. Compare that to what transpired last August during the market panic as the unemployment rate was climbing: bonds rallied briskly and spreads widened aggressively, sparking a deeply negative correlation between the two assets.
(To get specific, my preferred alarm bell metric to monitor from a past life is two-year BB spreads, since BB’s are the least junky junk-rated bonds, and the maturity gets straight to the heart of near-term concern or a lack thereof.)
This isn’t necessarily cause for comfort. On the contrary, the credit market not pricing in major growth worries now means there’s more scope for the stock market to price them in later, in the event that spreads do widen from here.
But in diagnosing what’s going on right now, the credit market offers a helpful point of corroboration that the US stock market sell-off is more of a momentum unwind than an expression of deep unease about the economy.
