Credit spread → US stocks

Common explanation (Cause · opposite direction): A wider credit spread means costlier funding and higher default risk for companies, weighing on share prices.

This issue: Credit spread at 9 (cold), US stocks at 94 (hot) — Credit spread below normal, US stocks above normal, in line with the common explanation (this is an inverse link).

Hot and cold describe position, not good or bad: warm does not mean a fall is coming, and an extreme reading does not mean a quick reversal. We describe history only, with no buy or sell advice.

Where it stands now

Where the two indicators stand this issue

Credit spread: Now 0.93 percentage points. US stocks: 84.4% above its 10-year average.

Tests

Does this link hold up?

Common explanationA wider credit spread means costlier funding and higher default risk for companies, weighing on share pricesSource: National Bureau of Economic Research, “Credit Spreads and Business Cycle Fluctuations” (2011).
Tested against our dataAgreement between the positions of Credit spread and US stocks (3-month lag), measured in the direction of the common explanation: +0.47 (an opposite-direction link: the raw correlation is −0.47, and a negative correlation fits, so the sign is flipped). Looking at every 5-year period (shifted one year at a time), the two moved in that direction in 24 of 39. Weak or inconsistent
Periods when it did not holdAcross 39 5-year periods, out of step in 1982⁠–⁠2005.

History

The two lines, overlaid

Data: Federal Reserve Board (Gilchrist–Zakrajšek spread); Professor Robert J. Shiller, public data. Positions: our calculation.

Credit spreadUS stocks

Limits

What this card cannot tell you

Moving together does not prove that one causes the other.
Links change over time; periods when this one did not hold are listed in full.
This is the historical record, not a forecast.

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