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Key Stock Market Indicator

Rising yields have prompted many market analysts, hedge fund managers, and big investors to pay attention to the bond market. There is a sense that the key stock market indicator of 2018 will, in fact, be the performance of high-yield bonds—also known as junk bonds. The fact that high-yield bonds have kept much of their value despite the sell-off in stocks on “Black Monday” 2018 has quelled investor fears of inflation. (Source: “Investors are watching this key indicator to see if the stock rout will screech to a halt,” MarketWatch, February 6, 2018.)

In other words, the suggestion appears to be the following. If stocks start falling in price, the way to predict how deep and long the correction—or whether we’re even dealing with a correction—is to observe how high-yield bonds are performing. If the latter high-risk instruments retain their value, it points to a prompt recovery. That’s how some are explaining Wall Street’s rapid recovery.

Stock Market Collapse 2018

On February 5, the Dow Jones Industrial Average (DJIA) suffered the biggest single-day loss in history. Such losses normally increase the level of risk in the bond markets. In other words, investors demand more reward for buying riskier debt instruments. The higher the risk, the higher the yield spread. The key factor is that spreads on February 5 only rose by 25 basis points, moving from 3.23 to 3.52. That still implies an acceptable level of risk and it took investors by surprise, given fears of a bond market crash. (Source: Ibid.)

The idea behind this latest of stock market correction indicators is that if junk bonds don’t crash, it means that the market does not expect the Federal Reserve to raise interest rates. The higher the inflation concerns, the higher the chance of the Fed lifting rates. This may be the most important stock market correction indicator now.