In the bond market, credit spreads rise during economic shocks like the collapse of Lehman Brothers in 2008. Spreads are moving higher again as investors fret over Europe’s debt crisis spreading to Spain and other countries.
“So when I see both a rising spread and stock prices, I think something’s got to give,” Stovall wrote in a note Monday.
“We believe that while it may be too early to say for sure that it is time to buy or bail, either bonds or stocks will soon likely alter their course,” he added. “Historically, when bond spreads have spiked, stocks have tanked. Yet this time, stocks have been reluctant to give much ground. Should equity investors ultimately be proven to be on the winning side of this game of chicken, prices should jump.”
