What Does a Hungry Bear Eat For Breakfast? Whatever it Wants!
by Richard Bavetz, ChFC®, FRC℠, March 19, 2026
What Can Bonds Tell Us That Stocks Can’t?
In the Age of TINA, There Is No Alternative (to stocks), most investors maintain a laser focus trained on watching every move in the S&P 500. Meanwhile, the “boring” Bond market gets little to no attention. Nevertheless, the bonds often have a story to tell, and lately it’s been trying to tip us off to something that’s been developing quietly beneath the surface, a subtle yet persistent divergence; and now credit spreads are blaring. As of today, the CDX Index—the key benchmark for credit default swap spreads—has reached a 9-month high while the S&P 500 oscillates within 5% of its all-time peak. Over the past 20 years, that exact “tee up” precipitated a bear market 100% of the time.
Canary in the Coal Mine?
Ignoring a 100% track record would be ill-advised, especially given the limited upside potential in the equities market. Credit spreads are among the clearest real-time readouts of risk appetite and are indispensable for understanding market sentiment. A credit spread is the difference in yield between two bonds of similar maturity but different credit quality. It is most commonly measured by comparing “risk-free” U.S. Treasury bonds to corporate bonds, which do carry default risk. By tracking these spreads, investors can read the market’s current appetite for risk. Widening spreads often signal rising stress in the financial system and frequently serve as early warning signals of stock-market corrections.
The chart below, which tracks the annual rate of change in the S&P 500 against the yield spread between Moody’s Baa corporate bonds and the 10-year Treasury, makes the relationship plain: rising spreads have repeatedly lined up with weaker equity returns over the decades.
Source: Sentiment Trader
Sadly, credit (debt) remains the lifeblood of the economy—businesses rely on borrowing to operate and expand, and households rely on borrowing to spend and consume. When borrowing costs rise, especially amid higher premiums demanded for riskier issuers, it signals underlying economic strain. That strain tends to weigh on forward earnings, increasing the likelihood of revaluation. The relationship is axiomatic.
The “Junk-to-Treasury” spread is the clearest barometer of this market dynamic. Investors who purchase high-yield bonds — those with a meaningful risk of default — should demand a yield premium above the risk-free rate paid by U.S. Treasury bonds. When those premiums narrow, it shows investors are in a speculative mood, happily chasing extra yield while accepting far too little compensation for the added danger. When the premium widens, sentiment has clearly shifted: lenders are growing cautious, credit conditions are tightening, and history shows that these periods of tighter credit have frequently preceded tougher times for stocks.
Source: Sentiment Trader
This isn’t abstract; it is a decades-long dataset that recurs over and over and here it is again. The bond market continuously prices risk across thousands of issuers and maturities in real time. It is far less prone to hype or retail momentum than equities, making its signals particularly reliable once they begin to build.
Source: Sentiment Trader
When credit spreads widen, investors should Stay Frosty.
What Does CDX Tell Us?
The second chart, from Sentiment Trader, captures the divergence in a clear historical context. No amount of jawboning will be more persuasive than what we see here. The top panel tracks the S&P 500 since 2007, the middle shows the CDX Index of credit default swaps, and the bottom displays its current position relative to a 189-bar historical range, showing how elevated they are relative to recent history (Note: red markers highlighting prior instances when spreads hit 9-month highs near when equity peaks).
Source: Sentiment Trader
Each of those earlier signals—2007, 2015, and 2022—preceded notable drawdowns. The 2007 signal preceded the worst financial crisis since the Great Depression. The 2015 signal preceded a sharp correction and an extended period of volatility. The 2022 signal arrived just before the Federal Reserve’s aggressive rate-hiking campaign drove the S&P 500 down 25%. And now, in early 2026, the signal has triggered again.
“This has been one of the more important divergences we’ve been tracking recently. CDX is pushing to a 9-month high even with equities near highs, effectively tightening financial conditions. Historically, this setup has been unstable: about half the time it led to sharp drawdowns, while the rest saw either mild pullbacks or continued gains.” –Sentiment Trader
The range-rank reading in the bottom panel further underscores that current levels sit toward the upper end of recent history—not noise, but a market quietly pricing in incremental credit stress. The accompanying “Risk Monitor” note reinforces this: financial conditions models are registering a tightening in early 2026 as spreads widen, a pattern that has historically preceded weaker equity performance by 2 to 6 months. The window to notice is before equities fully adjust.
The table below summarizes the four instances over the past two decades where CDX spreads hit 9-month highs while the S&P 500 traded within 5% of its peak. The subsequent market outcomes speak for themselves.
Does this guarantee a bear market is imminent? Not necessarily—the magnitude of past declines varied with the depth of the underlying economic impact. Yet every prior case began with the same set of circumstances beneath the surface: credit spreads widening while stocks initially looked the other way.
But make no mistake, the risk is elevated; this time is not different, and some say our underlying credit exposure is magnitudes greater than 2007. Whatever remains of the upside potential in the S&P 500, does it warrant maintaining a long position in 98% equities? Or is the balanced portfolio broken for good? One must assess one's own tolerance for risk, and those with shorter time horizons (<10 years) might want to reevaluate and consider their options sooner rather than later.
The Bulls Don’t Have A Compelling Argument
The bulls will argue that CDX spreads are widening from historically tight levels and that the absolute level of stress remains modest by historical standards. That’s technically accurate, as shown, Treasury-to-Junk Bond spreads in early 2026 are not at the panic levels seen in 2008 or 2020. So why worry?
They may be correct; but their assessment is incomplete, with a smidgeon of wishful thinking. “Narrow Framing” (making decisions without considering all implications) and “Loss Aversion” (expecting to find high returns with low risk) go hand-in-hand. These behavioral tendencies can affect both Investors and Fund Managers alike.
Source: Quantitative Analysis of Investor Behavior (QAIB)
Treasury-to-Junk spreads remain well below the panic extremes, as the recent junk-spread chart below confirms. Each historical signal triggered while spreads were still climbing, precisely because the turn was underway rather than complete. Layer on today’s backdrop—elevated valuations, stretched forward earnings, massive illiquidity throughout all sectors of finance, where even a modest credit shift carries more weight—yet a bullish sentiment persists.
When spreads widen, the knock-on effects tend to unfold in familiar ways: liquidity tightens further as capital rotates toward Treasuries, corporate refinancing costs rise, risk appetite moderates, earnings come under pressure, and economic momentum can slow. The credit market is effectively telling us the foundation is developing cracks while the equity side continues to party upstairs. History shows the celebration upstairs rarely lasts once the warning has taken hold.
…and so far, the same pattern is developing.
Source: Sentiment Trader
It isn’t the absolute level of the CDX that matters, but the direction of travel and velocity of change. If investors wait for the “spike,” it will likely be too late to act. Sentiment Trader’s 9-month high threshold isn’t about measuring the peak of a crisis; it is a warning of a potential turn. Credit stress doesn’t arrive fully formed. It builds. Each of the prior signals triggered before the real damage was done, precisely because spreads were starting to climb, not because they had already maxed out. The drop in equities will be at the tip of the tail.
Plus, there’s also the macro backdrop to consider. The S&P 500 enters this period with valuations near the upper end of its historical range, forward earnings estimates elevated, and sentiment still bullish, euphoric even. As investors ourselves, we monitor the high-yield spread closely because it is often one of the earliest signals of a fundamental shift in corporate and economic conditions. In other words, watching spreads provides insights into the health of the corporate sector, which is a major driver of equity performance. When CDX spreads widen, they often lead to lower corporate earnings, economic contraction, and stock market downturns.
The reason is that a significant widening of the CDX spreads signal:
Liquidity Flight: As investors become more risk-averse, they shift capital from corporate bonds to safer assets, such as Treasuries. The flight to safety reduces liquidity in the corporate bond market. Lower liquidity can lead to tighter credit conditions, affecting businesses’ ability to invest and grow and weighing on stock prices.
Corporate Financial Health: Credit spreads reflect investor views on corporate solvency. A rising spread suggests a growing concern over companies’ ability to service their debt, not just in bonds. Think Private Credit. Particularly if the economy slows or interest rates rise.
Risk Sentiment Shift: Credit markets are more sensitive to economic shocks than equity markets. When CDX spreads widen, it typically indicates that the fixed-income market is pricing in higher risks. This is often a leading indicator of equity market stress.
Corporate earnings may decline: Companies with lower credit ratings may struggle to refinance debt at favorable rates, thereby reducing profitability.
Economic growth is slowing: A widening CDX spread often reflects concerns that the economy is heading for a slowdown, which can lead to reduced consumer spending, lower business investment, and weaker job growth.
Stock market volatility may rise: As credit conditions tighten, investor risk appetite tends to decline, leading to higher volatility in equity markets.
Listening to credit spreads, particularly the high-yield spread versus Treasuries, is a critical indicator of stock market downturns. Historically, they have been a reliable early warning signal of recessions and bear markets.
What Should Investors Do?
This doesn’t mean sell everything and go to cash. You have to feed the bear! It means adjusting your portfolio’s risk profile to reflect the environment the data actually describes, not the one you’re hoping for. The window to act on a leading indicator is before the equity market confirms what credit is already pricing. Here are seven concrete steps worth taking today.
Rebalance to your target equity allocation. If a strong run in stocks has pushed your equity weighting above plan, trim back to target. This isn’t market timing — it’s disciplined risk management. Reducing exposure while prices are still elevated is always easier than doing it after a 15% drawdown forces your hand.
Tighten stop-loss levels on existing positions. In a normal market environment, wider trailing stops give individual holdings room to work. When credit spreads are signaling stress, tighter controls mean smaller potential drawdowns if the signal proves correct. Review your stops and tighten them by 20-25% from current levels.
Reduce exposure to the most leveraged sectors. Credit stress hits leveraged balance sheets first. That means lower-quality industrials, speculative-stage technology companies, and commercial real estate names with significant debt loads are the most vulnerable early in a credit-tightening cycle. Trim or exit overweight positions in these areas before the broader market reprices them.
Raise cash selectively as positions hit targets or stops. You don’t need to sell everything for cash all at once. As individual holdings reach price targets or trigger stop levels over the coming weeks, let the proceeds accumulate rather than redeploy them immediately. A 10 to 15% cash position is a buffer, not a bet — it gives you the flexibility to act when better opportunities emerge after volatility arrives.
Shift fixed income exposure toward quality and shorter duration. When CDX spreads widen, high-yield bonds get hit from two directions: rising spreads and the flight-to-safety bid that compresses Treasury yields. Now is not the time to be reaching for yield in the bond portion of your portfolio. Move toward investment-grade and short-duration instruments that hold up better in risk-off environments.
Review your portfolio’s correlation in a stress scenario. Many investors believe they’re diversified until a credit event hits and everything moves down together. Pull up a stress test and map how your current holdings performed in 2015 and 2022. If the model shows unacceptable drawdowns in a repeat of either episode, you know exactly where to focus your risk reduction efforts.
Keep watching the CDX spread level — don’t declare the all-clear prematurely. This signal requires monitoring, not a one-time response. If spreads continue widening from here, the risk posture should tighten further. If they reverse and compress back below nine-month highs over the coming weeks, the urgency eases. Set a weekly review cadence on credit spread data. The bond market will tell you when the risk is rising and when it’s fading — but only if you’re paying attention.
There is no guarantee this time ends the same way as 2008, 2015, or 2022. Markets can and do defy patterns. But a three-for-three track record on a clearly defined signal, in a market already carrying stretched valuations and thin risk premiums, is not something a responsible investor waves on. The credit market is raising its hand. It deserves an answer.
Richard Bavetz, ChFC®, FRC℠ is a Chartered Financial Consultant® (ChFC®), a Federal Retirement Consultant℠ and an Investment Advisor with over 28 years of experience. As a Fiduciary, he works with High-Net-Worth investors, Foundations and Endowments, offering dynamic & innovative investment portfolios in a relationship-centered advisory role. This market outlook is for educational purposes only. Before making decisions, always seek the advice of an investment professional who can evaluate your specific individual situation. Advisory services are offered through J.W. Cole Advisors, Inc. (JWCA). Carington Financial (CF) and JWCA are unaffiliated entities.
1. Yield Spreads Flash Warning: Market Risk May Still Linger | Advisorpedia https://www.advisorpedia.com/markets/yield-spreads-flash-warning-market-risk-may-still-linger/
2. Credit Spreads: Markets' Early Warning Indicators | Newsmax.com https://rss.newsmax.com/Finance/lanceroberts/credit-spread-bull-bear/2024/12/03/id/1190187/