If you want to watch the mayhem, look to the stock market. But don’t rely on the stock market to tell you much about the economy…

Stocks are erratic. Investor emotions can drive wild swings day to day… whether we’re in a normal market environment or a brutal one like we’ve seen lately.

So, crazy price moves don’t always mean serious trouble.

Instead, you need to look at the bond market to get a read on if the overall economy is about to crumble. And unfortunately, the bond market doesn’t think we’re in the middle of an ordinary sell-off. Instead, the economic situation has a chance to get a whole lot worse.

Let me explain…

Stocks swing wildly in uncertain times. That’s because a lot of assumptions go into stock prices…

It’s a combination of what growth is going to look like… how that growth will translate into profits… and how much investors are willing to pay for those profits.

This “equation” is already complicated. And it changes a lot when those questions don’t have easy answers.

Bonds are easier. Assuming you’re holding a bond to maturity, you only need to answer one question: Will I get my money back?

Mostly, bond investors don’t have to worry about that too much – except in times of real economic distress. And that means looking at the bond market can help us confirm or deny what’s happening in stocks.

How the Bond Market Could Signal a Looming Recession
Specifically, we want to look at interest-rate spreads between the safest and riskiest bonds. Safe bonds – like Treasury bonds – never have a risk of default. But when the economy is faltering, high-yield – or “junk” – bonds have an increased risk of default.

That’s why we look at the high-yield credit spread… that is, the difference between these two yields. When this measure spikes, it shows risk is soaring. And it’s a serious red light for investors.

Unfortunately, that’s exactly what has happened in recent weeks. Take a look…

This chart shows the ICE Bank of America U.S. High Yield Index Option-Adjusted Spread. Don’t let the complicated name throw you. It’s simply the yield on high-yield bonds minus the yield on U.S. Treasury bonds.

The spike we’ve seen in recent weeks is a bad sign. It’s a clear red light for investors and the economy.

The high-yield spread was at roughly 3.1 on March 24. It has since spiked above 4. And it peaked above 4.6 on April 7, after Trump announced his new global tariff policies.

This is the highest reading we’ve seen in more than a year. But it’s not just the level that signals tough times ahead… It’s the furious rally it took to get here.

The only similar spike over the past decade was at the start of the COVID-19 pandemic. That doesn’t mean a recession is certain. But the bond market is telling us that the probability of economic turmoil is growing… quickly.

If you’re a longtime reader, you know I’m an optimist by nature. But optimist or not, this is a red light you shouldn’t ignore.

The good news is, spreads have fallen from their recent peak. That means we could end up shrugging off this current bout of pessimism. But if the spread spikes again from here, economic turmoil could easily follow.

Either way, the bond market is worried… And that’s worth paying attention to.

Good investing,

Brett Eversole

The DOGE Shock: Nine Stocks to Buy [sponsor]
They say that DOGE's real agenda could shock the entire stock market in the coming days - sending a handful of widely unknown stocks soaring. And they've compiled the definitive investment playbook for anyone who wants the opportunity to capitalize. More here...

Source: Daily Wealth