The chart below highlights the relationship between high yield credit spreads (B of A High Yield Master Index) and the S&P 500. Over the last two years, the two have practically been mirror images of each other, so when spreads rise, stocks decline and vice versa. Logically, this makes perfect sense as higher credit spreads imply that investors are demanding more compensation to lend and falling spreads imply investors are willing to take on additional risk.
What makes yesterday's nearly 2% decline in the S&P 500 stand out is that credit spreads actually saw a slight decline. So, even as equity investors were becoming more risk averse, investors in the credit markets actually became slightly more willing to take on additional risk. To put yesterday's divergence in perspective, there have been 136 days since the start of 2008 where the S&P 500 dropped more than 1.5%. On those 136 days, credit spreads have declined 22 times, or 16.2% of the time.
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