RinjaniCapital

Simple Credit Indicator to Watch Out for Equity Investor

TVC:SPX   S&P 500 Index
There is a classic saying that credit markets tend to lead equity markets.

The rationale is that credit investors are solely more concerned about downside risk (as they worry whether coupons will be paid and whether they will get their principal back at maturity) and measure risks and determine spreads - over the risk free/benchmark rate - by factoring in the probability of default into the spreads amongst other factors.

While equity investors, given their ability to participate on the upside as opposed to debt/credit investor, tend to be more forward looking with an optimistic bias (glass half full attitude).

Hence, credit tends to turn first when risk is slowly bubbling in the cauldron. That's what I've been told anyway.

Without further ado, if you refer to the chart published, you will be able to see how credit has played out during the past few crisis. Data used are S&P500 and ICE BofA US High Yield Index Option-Adjusted Spread (inverted)