In the weekly update of Renaissance Macro, technician Jeff Degraff has this to say about their use of the credit spreads:
The only area in which the economist is not strong in predicting recessions is what happened at the credit markets. Renaissance Macro has always been great in the use of credit market data. For 25 of the 35 years of his career, Jeff is focused on credit because credit is such a good window on the soul of the economy.
There is not much value for company credit. Corporate Credit Spreads are incredibly tight and we will hardly be under pressure to have a recession when the business credit spreads.
Credit Spreads will reflect the expectations of the total demand, because if the total demand is a contract, the assets of a person to pay your bills or interest payments, falls. Your margins are compressed and that will be reflected in the credit markets.
This morning I saw this updated illustration that probably explains what Jeff has:
The top of the graph is the S&P 500 and the soil is the spread between fixed income in investment degrees and fixed -income income from the government. Currently it is at one of the lowest points in the past five years.
But in a sense, the person who illustrates this graph wants to look at it more in regimes. The green part is when the credit distribution is very tight. You can see the corresponding color code. The stock index is doing well when the credit distribution of the investment quality is tight.
If it is amber or red, there is greater volatility.
It feels a bit like the same behavior in the VIX, or the place implicit volatility index of the S&P 500.
When the VIX is high or in the middle, you get rougher markets. But when the VIX is really low, it is when shares are performed.
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