We keep hearing that deteriorating credit spreads are heralding an important stock market top. The chart below, covering nearly a century of market data, does not support this view. While it’s true that credit spreads have widened in 2015, this condition has occurred frequently during healthy bull markets. There are too many false positives to justify a negative outlook based on this indicator.
This is not to say that equities are headed higher. Valuations are historically rich and market breadth has thinned noticeably in 2015. Both of these factors are legitimate warnings of trouble ahead.
Bottom line? The equity market may be topping, but credit spreads are not the reason. Testing the assertions of others is an important part of market analysis. When it comes to asset allocation, knowing what doesn’t work is half the battle.
