Remember the end of “Animal House”?
Kevin Bacon, standing in the middle of complete chaos, screaming, “Remain calm! All is well!” right before getting trampled by the crowd?
That’s what the bond market looked like on Thursday.
The Nasdaq was getting crushed. Stocks were selling off. Everybody was freaking out.
And the bond market? Not so much.
Of everything that happened in markets this week, that’s what stood out to me the most.
I would’ve expected bonds to be a lot more nervous. Stocks can fall because investors think companies are too expensive.
But when investors start worrying that companies won’t be able to pay back their debts, that’s a different kind of problem.
That’s why I watch the bond market so closely.
I want to know whether the fear in stocks is spreading somewhere else.
Even the Broke Drunk Brother-in-Law Is Behaving
We’ve talked before about CCC-rated bonds. These are the riskiest corporate bonds out there.
They’re like your drunk broke brother-in-law of the bond market.
When investors get scared, these are usually the first guys to start causing trouble.
But here’s the crazy part.
Even after Thursday’s Nasdaq crash, the extra yield investors demand to own CCC bonds instead of safer bonds was actually lower than it was last week.
Think about that.
If you had told me the Nasdaq was going to get crushed on Thursday, I would have expected credit spreads to blow out.
They didn’t. Not even close. They’re still just in their range.
I encourage you to go look across the range of junk bond spreads and see for yourself.
To keep things simple, I’m showing you the ratio between junk bonds (HYG) and U.S. Treasury bonds (IEI):
When this line falls, investors are favoring safer government bonds over riskier corporate bonds.
When it rises, they’re more comfortable taking risks. And look at that.
Even after Thursday’s stock market selloff, this ratio is still above last week’s lows.
Who’s Right, Stocks or Bonds?
So what does this mean for investors?
Maybe the bond market is right. Maybe Thursday’s stock market selloff isn’t the beginning of some bigger disaster.
Maybe investors are getting worked up over nothing.
Or maybe bonds just haven’t gotten the memo yet.
That’s the part we don’t know.
What we do know is that the riskiest part of the bond market isn’t confirming the fear we’re seeing in stocks.
At least not yet.
And that’s the important part.
Kevin Bacon kept telling everybody to remain calm right up until he got trampled.
Let’s see if the bond market has a better ending.
On Monday, we revisited the word of the year for the stock market.
We talked about “dispersion” for the first time back in February.
Those differences are telling us where leadership has moved today.
On Tuesday, we thought about a Saturday afternoon with the family.
Some are shopping at Target and Apple, others are booking flights and buying lunch, many are using their Visa.
In other words, as a proper chart would show, people are spending money.
On Wednesday, we broke down one of Warren Buffett’s favorite Charlie Munger quotes.
“There are only three ways a smart person can go broke: liquor, ladies, and leverage.”
Folks, as Uncle Warren knows, it’s really about the leverage.
On Thursday, we explained how we were buying Berkshire when everybody was laughing at it.
Now, everybody’s laughing at gold and silver.
So is the laughter a warning, or is it the setup…
On Friday, we thought again about what a world where crypto is a major part of how we save, invest, and move money looks like.
We don’t need to guess what Bitcoin or Democrats are going to do to understand what’s happening.
We just need to watch the price of Coinbase.
On Saturday, Grant Hawkridge broke down what happened on Wednesday and Thursday.
One day five out of stocks are going up, the next they’re having their worst day of the year.
Next time the buyers show up, we want to see them come back the day after.
Have a great Sunday.
We’ll see you Monday morning…