S&P 500 Falls as Credit Spreads Widen and Real Yields Surge

Stocks finished the day lower, with the S&P 500 falling more than 1.2%. The losses were concentrated in the megacap technology stocks and Tesla. It could have been worse, however, had it not been for a roughly 30-basis-point rally in the final 10 minutes of trading. Those types of late-day rallies are often reversed the following morning, raising the possibility that the market could gap lower at the open, tomorrow.

Credit spreads continued to widen today, with Nvidia’s 5-year CDS spread increasing to 69 basis points from 65. What is interesting is that the stock has continued to hold up despite the steady widening in credit spreads.

Of course, I am simply reporting what I see in the market. I have no special insight into what is happening behind the scenes or whether this widening reflects investors hedging existing positions or making outright bearish bets. Still, it is worth noting that, historically, sustained widening in CDS spreads has often coincided with weakness in the underlying stock price. The current divergence between Nvidia’s credit and Nvidia’s stock is therefore notable.

(LSEG)

For illustrative purposes, Oracle’s stock performance is more in line with what I would typically expect to see when CDS spreads widen.

(LSEG)

In the meantime, the Dollar Index appears to have broken out of the bull flag pattern mentioned yesterday. While the ECB did not rule out further rate hikes, the surge in oil prices appears to have been enough to help lift the dollar above the top of the pattern.

The other oddity is that, despite the surge in oil prices, 2-year inflation swaps have hardly moved. That is not something we have seen very often.

It raises an interesting question: does the market really believe Kevin Warsh is more committed to bringing inflation down than it did Jay Powell? Based on current pricing, it certainly appears that way.

(LSEG)

Whatever the case, real yields continue to surge higher, with the 10-year TIPS yield rising to 2.43%, just 10 basis points below its cycle high reached in late 2023.

(LSEG)

At this point, the market appears to be doing the tightening for the Fed. If financial conditions continue to tighten enough to slow growth and bring inflation lower, the Fed may not need to raise rates further because the market will have effectively done the job for it.

-Mike

Michael Kramer publishes independent macro and options research read across 10+ platforms and by institutional desks.

For institutional partners: research syndication, licensing, and bylined or white-labeled commentary for platforms, brokers, and publishers.

Inquire →

Glossary by ChatGPT

Basis Point (bp) — One one-hundredth of a percentage point, equal to 0.01%.
Bull Flag Pattern — A technical chart pattern that typically signals a continuation of an existing upward price trend after a brief consolidation.
CDS (Credit Default Swap) — A financial contract used to hedge or speculate on the credit risk of a borrower.
Credit Spread — The difference in yield between securities of differing credit quality, often used as a measure of perceived credit risk.
Dollar Index (DXY) — An index measuring the value of the U.S. dollar against a basket of major foreign currencies.
ECB (European Central Bank) — The central bank responsible for monetary policy for countries using the euro.
Financial Conditions — A broad measure of how borrowing costs, asset prices, credit availability, and exchange rates affect economic activity.
Gap Lower — An opening price that is significantly below the previous trading session’s closing price.
Inflation Swap — A derivative contract that allows investors to exchange fixed payments for payments linked to realized inflation.
Megacap Technology Stocks — The largest technology companies by market capitalization, often with significant influence on major stock indexes.
Real Yield — The yield on a bond after adjusting for expected inflation.
TIPS (Treasury Inflation-Protected Securities) — U.S. Treasury bonds whose principal adjusts with inflation to help preserve purchasing power.

Disclosure

This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.