Low-quality companies can access investor capital, but they have to pay up for it.<\/p>\n
That means junk bond issuers pay a bigger interest rate to borrow compared to a high-quality issuer, like an established blue-chip company or the U.S. Treasury.<\/p>\n
The difference in that interest rate is called a spread, and the spread can vary based on the perceived likelihood that investors will get their money back.<\/p>\n
During times of strong economic growth, spreads tend to be low… meaning investors aren’t demanding extra compensation because the chance of being paid back is high.<\/p>\n
But when the economic outlook starts deteriorating, investors demand a larger spread to compensate for the risk of defaulting.<\/p>\n
And since a widening spread reflects concerns over the economy, they also make a great forecasting tool.<\/p>\n
Just look at the long-term chart below of spreads overlaid with recessions (grey shaded area)…<\/p>\n
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You can see that spreads started rising well before the last three recessions hit. And not only do rising spreads precede recession, but they also flag downside risk in stocks.<\/p>\n
Those last three recessions also coincided with the last three major bear markets, and spreads were widening before<\/em> the most severe stock market declines unfolded.<\/p>\n Entering 2022, high-yield spreads were running at historically low levels… reflecting investor attitudes that things appeared rosy.<\/p>\n But as the Fed continues to hike rates at a historic pace to slow the economy and bring down inflation, concerns are emerging that financially vulnerable companies could face difficulty making payments.<\/p>\n That’s reflected in widening spreads this year, which have gone from 3.1% to 4.6%.<\/p>\n But over the last several months, spreads are setting up a chart pattern that could influence the next big move in stocks.<\/p>\n After widening from the start of 2022 through June, junk spreads are trading in a narrowing range. Take a look at the chart below…<\/p>\n Here’s what you need to watch now…<\/p>\n If spreads break down and fall out of this pattern, that’s a sign bond investors are pricing in a soft landing for the economy… and that would be a big plus for the stock market.<\/p>\n But if spreads shoot higher out of this pattern, it means just the opposite.<\/p>\n That would be a sign that the outlook is darkening quickly, which I expect would weigh heavily on stocks like the last three bear markets (you can track this same spread for yourself here<\/a>).<\/p>\n So instead of trying to guess the next turn in stocks, you can use signals from the bond market to tip the next move.<\/p>\n Recently, my colleague Jeff Clark also showed you how to use market signals<\/a> to get ahead of the next big swing. To take advantage of these signals, he has a trading system that requires inputting just one “code” at a time into your brokerage.<\/p>\n It’s so easy, almost anyone can do it. Simply put in his next “code,”<\/a> and you could watch your money double in just days…<\/p>\n To find out Jeff’s latest “code,” go right here<\/a>. It could be the difference between staying ahead of this market… or losing your shirt.<\/p>\n Best regards,<\/p>\n Clint Brewer <\/p>\n In today’s mailbag, a couple of subscribers share their thoughts…<\/p>\nThis Pattern is Key to the Next Move in Stocks<\/strong><\/h2>\n
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\nAnalyst, Market Minute<\/em><\/p>\nReader Mailbag<\/strong><\/h2>\n
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