Is The Bond Market Telling Us The Stock Market Sleigh Wreck Is Almost Over?

No Santa Rally this Year (so far)Getty

The S&P 500, the Dow Jones Industrial Average and the Nasdaq Composite are all down almost 6% in December.  Last week, the stock markets tried to rally, with the S&P 500 getting to 2,675 on Tuesday and Wednesday, but it lost momentum those days and finished the week very poorly, closing below 2,600 for the first time since April 2nd.  The S&P 500 has provided a negative return on the year, which is almost shocking as companies are allegedly on pace to spend a record amount on stock buybacks and extremely large corporate tax breaks took effect.

As we try and determine when this current weakness will end, there were some encouraging signs in the credit market.

The Bloomberg Barclays US Corporate Spread Index dropped from 145 bps to 140 bps on the week.  That is an improvement in credit spreads.  When looking at the average spread of the bonds in LQD, that dropped from 189 bps to 178 bps (according to Bloomberg), which is an even more impressive performance.

The CDX IG index, an index of Credit Default Swaps, linked to 125 U.S. investment grade companies, closed the week at 79.25 which was more 3 basis points tighter than where it closed last Friday.

GE was one of the leading drivers of credit market improvement, but certainly not the only credit that showed signs of strength in the face of ongoing equity pressure.

The high yield market also did well, with HYG and JNK (two large high yield bond ETFs) posting gains on the week.

[“source=forbes]