The chart above tracks the broad stock market against the spread of lowest-rated investment-grade corporate bond yields. They normally track each other very closely as they both reflect broad investor risk appetites.
When investors are hungry for risk stock prices move higher and corporate spreads get narrower. When risk aversion takes over, however, stock prices fall and spreads widen.
Another reason they closely track each other is corporations’ ability to access credit is very closely tied to the overall demand for equities. When it’s very cheap for companies to borrow, it’s very easy for them to fund stock buybacks and acquisitions of other companies.
Certainly, these two factors have been very important to the bull market of the past six years or so. Ray Dalio recently said he estimates that…