Where Is Stress Showing Up In Markets?

1.) STRESS – One of the things we pay close attention to is when evidence of financial stress starts to build beneath the surface of the market. The type of data we use tells us whether the market is under real pressure or whether people are just stressed about the stories in front of them. Big difference. If you turn on the news every day, you’d think investors have a new reason to panic every week. It’s all tariffs and interest rates, government debt and recession forecasts. The list never seems to end. Antidote? Turn off the TV. It’s useless for investors. Anyway, the Fed Financial Stress Index is a great measurement. This is essentially a pressure gauge for the financial system. Banks, lending markets, funding markets, and credit conditions all feed into it. What is the Fed Financial Stress Index saying? Not much. Calm. Right now, it’s sitting below zero. The financial system isn’t behaving like it’s under pressure.

2.) SPREADS – High-yield credit spreads measure the extra interest investors demand for lending money to riskier companies. When investors become worried about defaults, recession, or economic weakness, those spreads widen quickly. Right now, they’re sitting near the lower end of their historical range. That is not what you’d normally expect to see if investors were genuinely worried about a major economic problem building underneath the surface. Of course, markets can still correct with these stress metrics in calm territory. The difference is that when low, corrections are buyable. Spreads this low tell me stress is not building, nor is fear spreading through the credit markets. Bull markets don’t usually end when financial conditions are calm. They usually die when stress starts spreading underneath the surface.

3.) VIX – The volatility metric for the S&P 500 is now giving a “buy signal” for the second day. That simply means that it would not be surprising to see volatility move up some from here. Does that mean we’re right before a bit of a market storm? Maybe, but doubtful. Volatility of Volatility is still trending downward, and any recent spikes have been met with a lower high. Same for VIX. If we do get a pop higher in VIX, 18 is likely a good short-term topping point, which wouldn’t really coincide with a big drop in the S&P 500. So, financial stress indicators are calm, and so is VIX. Much of that is due to the data. Nominal Growth is about +7%, Earnings Growth is accelerating, EPS Estimates are rising, Oil is in a newly minted Bearish TREND (downward price bias), and VIX remains in a Bearish TREND, which keeps the S&P 500 in a Bullish TREND. On top of this, S&P 500 Gamma is positive (mainly means that dips are bought and rallies are chased), and 10Y Yields were down -14bps week over week. All those spell decent conditions headed into a summer season.