Either Financial Conditions Improve Or The Stock Market Corrects

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Includes: DIA, QQQ, SPY
by: Financial Sense

By FS Staff

The Bloomberg US Financial Conditions Index and the S&P 500 tend to move in pretty close unison. In March, however, they started to move apart in a manner similar to late last year, before the market took a nosedive. Once again, either financial conditions improve or the stock market corrects.

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Source: Bloomberg

Below, we see a similar wide divergence when looking at credit spreads (inverted, in red) compared to the S&P 500 (in black). When financial conditions are healthy, credit spreads narrow, since investors require less compensation for the risk of holding non-government securities. As financial conditions deteriorate and default risks increase, credit spreads widen. The credit markets were confirming the message of the stock market up until mid-2014 and have continued to diverge ever since. Either credit spreads narrow or the stock market adjusts.

Click to enlarge
Source: Bloomberg