However, when financial conditions were easing, indicated
by tighter credit spreads, the Russell 2000 outperformed by roughly 1 percent a month.
Not exact matches
I noted a week ago that Bernanke had essentially eased monetary policy
by spurring a loosening of financial conditions via higher stock prices, lower bond yields,
tighter credit spreads, and a weakening of the U.S. dollar.
Looking back over the past fifteen years, in months when high yield
credit spreads were widening, indicating
tighter financial conditions and more risk aversion, the S&P 500 outperformed the Russell 2000
by an average of roughly 0.45 percent.
By looking at how the
credit spread for a category of bonds is changing, you can get an idea of how «cheap» (wide
credit spread) or «expensive» (
tight credit spread) the market for those bonds is related to historical
credit spreads.
Financial firms are opaque
by nature, and investors should be skeptical of those furthest out on the risk spectrum, particularly when
credit spreads are
tight.
By that time, the stock market would be much higher, about as high as it was in October 2001, and
credit spreads tighter.