By Kevin Muir
There are lots of theories as to why the stock market is selling off so hard. I have my views, but to a large extent, opinions don’t mean much in this environment. It’s like when your grandma tells you she was once quite a dish. Sure, it might be true, but it’s not doing much for anyone today.
I just want to point out the action in 10-year high-yield spreads. This is the rate that high-yield bonds are yielding above government treasuries.
To me, credit spreads are all that matter. Stocks are simply backing up in sympathy with the widening of credit spreads.
According to Bloomberg, yesterday was the biggest one day expansion in high-yield credit spreads since August 2011. That’s not good and it’s no wonder stocks are struggling.
Yet, amidst all of this doomsday talk, it’s instructive to step back and look at the bigger picture.
Have we been here before? And what was the outcome back then?
Well, the past 3-month widening has been a touch more quick, but the move resembles 2014 to a surprising degree.
In 2014 the 10-year Barcap high-yield spread widened from 250 basis points all the way to 525 basis points in mid December. Interestingly, the high of the credit spread corresponded with the FOMC meeting – December 17th.
During the past three months, the credit spread has moved a similar amount to the 2014 episode. The only difference is that this December 19th FOMC meeting didn’t prove the high, but instead only encouraged more selling of credit.
Will it get worse from here? Will traders continue selling everything in a desperate attempt to get risk off the sheets for year end?
Or have we reached that ‘obscene point’ where it makes sense to take out some blue tickets?
Regardless of your view, keep your eye on credit spreads. It will be difficult for stocks to rally without this spread tightening back to more reasonable levels. At the very least we need the selling in credit to stop and for spreads to stabilize.
Yet if 2018 looks anything like 2014, we very well could have reached that point yesterday.
Thanks for reading,
East West Investment Management
Global Select Opportunities Fund
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