Credit spreads and equities

There is an historical relationship between credit spreads and the stock market. Yo can see that in the top chart below.

Credit markets often notice trouble before equities do. Look at the last three cycles:

📉 2007: spreads bottomed in June, the S&P 500 topped 4 months later

📉 2014-15: spreads bottomed in June '14, the S&P topped 11 months later

📉 2021-22: spreads bottomed in mid-'21, the S&P topped 6 months later.

The lead time varies from 4 to 11 months, but the order has been consistent. Spreads turn first.

High yield spreads (the ICE BofA US High Yield index) have now bottomed and started to turn up, at 3.24%. Meanwhile the S&P 500 sits near 7,700.

The stress isn't evenly spread yet. Since Feb 27, CCC spreads have widened roughly 384 bps, while B and BB spreads are about flat (BB +10 bps, B -22 bps). The weakest borrowers are the first to lose market access.

Historically, stress moves up the quality ladder: CCC first, then B, then BB, and eventually investment grade. The B and BB lines only started ticking up in the last few weeks, so that's the signal to watch. If they follow CCC, equity markets will have a harder time ignoring it, since higher funding costs hit margins, buybacks and M&A.

None of this is a timing tool. Spreads can widen for months while stocks grind higher, and a widening in one corner doesn't guarantee contagion. But when the market is priced for perfection, it’s time to watch the credit canary in the equity market coal mine.

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