Game of Trades: Credit Markets are Flashing the Same Warning Signal For Stocks That We Saw In Late 2021
Investors don’t often pay attention to credit markets. But it’s a space that tends to be more cautious. Consequently, it spots trouble earlier than in the stock market.
Right now, credit spreads are rising. This trend higher suggests that cautious investors expect more potential trouble ahead. While it’s still in the early stages of warning, by the time the alarm bells are blaring, other markets will have sold off.
Credit markets will likely continue to deteriorate in the coming months. Spreads rise when there’s increasing concern about a slowing economy. Credit spreads then tend to spike during a recession. That occurred in 2001, 2008, and briefly in 2020.
Spreads then tighten as risks come down. That makes credit spreads leading indicators for how the stock market will perform. And a good sign for when a crisis has hit.
With rising credit spreads amid a rising stock market so far this year, it’s clear that there’s a disconnect. It’s a sign that the market’s move higher in recent months may not be healthy or sustainable.
This last occurred in 2021, and the disconnect between credit markets and the stock market lasted for six months before a market selloff.
And that investors can expect more market volatility… and likely a meaningful drop ahead.