Credit-Market Sentiment and the Business Cycle

Stock markets might be notoriously unreliable predictors of economic activity, but credit markets seem quite accurate at forecasting the future. Economists David Lopez-Salido, Jeremy C. Stein and Egon Zakrajsek analyzed decades of American market data and found that if spreads are low and junk bonds are popular today, you can expect a downturn in two years. Exactly why this occurs is open to debate, the authors admit, but it’s a tidbit of intelligence that savvy investors might want to take under advisement. One caveat: With a few exceptions, this report’s turgid prose will be tough sledding for readers who don’t possess advanced training in economics. Nonetheless, getAbstract recommends it to investors and policy makers for its insight into credit markets and the economy.