Oil hit a bottom on February 11, and notably, so did stocks and spreads on junk bonds. Who says oil isn’t driving psychology!
Look at the close relationship between stocks and oil in the chart below.
More importantly, in my view, look at how the tightening in high-yield spreads are moving lockstep with the bump in oil prices.
Rising junk bond spreads have historically been a sign of tighter financial and credit conditions. Tighter credit conditions can choke off the supply of needed capital to businesses, and poof, there goes the recovery.
If spreads have peaked, it’s a very encouraging sign for the economy in the second half of 2016.
