The Credit Market and the Stock Market are in agreement and being competing claims in the capital structure. This seems like an unlikely set of words. But the reality isThe chart below shows both Credit Spreads + Stock market Valuations are more than 1 Standard Deviation expensive.You don’t see many readings at that level, and whenever you do it’s either late in the cycle or just before something bad happens.
Being a contrarian indicator, when valuations reach extremes it tells you everyone is thinking the same. That means there are not many more minds left to join that consensus and add to buying flows, but in contrast — there are many many minds that are already all-in and could be easily be changed if presented with the right evidence or catalyst. And when equity investors change their minds on the stock market, they sell: stock prices go down. When credit investors change their minds on credit markets, they either sell (if they can), stop lending, and/or bump up their required margin of safety. This can become self-reinforcing, and there are many such cases of this kind of thing playing throughout history.When everyone else’s minds are made up, that’s the time to be most mindful. Mindful of the risks, mindful of your asset allocation —and mindful of what you’d need to believe to stay on the bandwagon vs what would need to happen for the many minds to change (and whether or not you are prepared for that).Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risk