May 2, 2025 – In today's Smart Macro segment, Chris Puplava, Chief Investment Officer at Financial Sense Wealth Management, analyzes the credit markets amid recent stock market volatility. He notes a divergence, as credit markets, including distressed debt spreads and credit default swaps, show a muted recovery compared to the stock market's strong rebound post-tariff pause. Puplava highlights rising recession odds (63% per Polymarket) and surging Treasury yields on weak economic data, signaling deficit concerns. The BofA MOVE index’s uptick suggests Treasury market stress. He warns that the stock market’s optimism may lead to a downside correction, driven by economic realities outweighing tariff-related hopes.
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Charts discussed in today's show:
Transcript
Cris Sheridan:
Well, if you want to know what's going to happen with the markets, one of the most important places to look is the credit market, something that we've discussed multiple times, especially in the lead-up to the last major correction, where we did say that the credit markets were flashing a warning signal. We're going to get an update on that information today, speaking with our chief investment officer here at Financial Sense Wealth Management, Chris Puplava. So, Chris, where do things stand with the credit markets today given all the turbulence and volatility that we've seen in the stock market?
Chris Puplava:
Well, you know, I think, Cris, I mentioned a little bit before when, you know, the markets initially were starting to decline in mid- to late March. And what I was noticing, though, was that the credit markets didn't have much of a bounce from mid- to late March, and they were diverging a little bit where they weren't kind of singing to the same tune that the stock market was. And that was, you know, to me, worrisome heading into the tariff announcement on Liberation Day. And sure enough, credit markets were kind of leading the stock market lower. And the stock market soon followed suit. And further, the other thing I noticed was, ever since the bottom, we basically got a reprieve with the pause on the 90-day tariff for reciprocal tariffs, and the market took off. But when I look at the credit markets, I'm not seeing the sizable recovery that we're seeing in large-cap U.S. stocks, particularly the, you know, Magnificent Seven, which were really beaten up. I think hedge funds, which were shorting them, were basically taking profits and covering their shorts and helping to drive the stocks higher. And what I mean by that, in particular, is I look at distressed debt, so triple-C and lower, versus junk debt, which is double-B or lower. And I'm looking at the spread. So, you know, the worst of credit relative to sketchy credit, you know, with junk bonds. And those spreads, Cris, have not really improved since, you know, the peak that we saw with the stock market when the stock market bottomed, and credit spreads are starting to roll over again, and they have now for about a week, even with the stock market rallying. So, you know, two points. Number one, they didn't improve to the same extent that the stock market did. Number two, they're now starting to deteriorate. And to me, a lot of that is looking at the negative economic surprises we have been seeing. So, I think what the credit markets are more concerned about is the economy, while I think the stock market is more fixated on tariff headline news. And I think the credit markets are looking past the headlines and looking further down the road. Okay, maybe we get some trade deals, and that's great, but, you know, has the damage already been done to the economy, to the consumer, to business psyche? And I think that is starting to be more or less what they're starting to discount. And not just looking at credit spreads. Even when I look at credit default swaps on investment-grade or high-yield debt, there too, we haven't seen the really strong recovery. I mean, if you look at the stock market, it's almost back to where it was, you know, pre-Liberation Day. That is not the same with the credit markets. They've maybe recouped half or less than half of the decline since Liberation Day, while the stock market is almost there. So, again, very muted response and recovery. And particularly in credit default swaps, they've been going sideways now really for the past almost two weeks. So, we've seen the market have a winning streak, but that is not the case when looking at the credit default swap market. So, you know, that's a real concern for me. And also too, Cris, just looking at recent data. So, for example, on Wednesday, we got ADP's release for March payrolls. Those came in at 62,000 versus the consensus of 115,000. Of all of the economists, the lowest estimate was for 65,000. It was literally below every single economist's estimate for March. And what I noticed was looking at the 30-year Treasury yield, it spiked on the news. And then later, I believe 45 minutes later, we got the GDP release, which was negative 0.3% for the quarter versus negative 0.2% estimate consensus, and bond yields surged even further. My interpretation was that yields are surging on bad economic data, not what you would expect, because the bond market is concerned about how sizable the budget deficit is. The idea that maybe DOGE won't be able to make as drastic cuts as originally thought, and if we have a slowdown, that means lower tax receipts, less money coming in, and more payments going out in terms of government stabilizers for unemployment, that we could really see the deficit blow out, which would mean further Treasury supply. And then today, on Thursday, we saw jobless claims come in at 241,000 versus a consensus of 223,000. Instantaneously, the 30-year Treasury yield started to spike. The ISM did come in better than consensus, but it was still, for April, 48.7; that is still in contraction territory. And again, yields spiked further. So, I think the message from the bond market is that it does not want to see weak economic data. It wants Goldilocks. If it comes in too strong, that means higher inflation, higher rates. But you also don't want it to come in so weak that we might have a recession or reduced tax receipts from a slowing economy. And, you know, the one thing that really caught people's attention, and it's why a lot of people said it wasn't a Trump put, it was more a percent put, is the bond market. You know, we didn't really see any concerns about Wall Street, which is what the message has come from the Trump White House. What we saw is concern for the U.S. Treasury market, not the stock market. And, you know, a lot of people are familiar with the VIX index. That's the volatility for the S&P 500. There's the BofA MOVE index, and that's basically the VIX for the U.S. Treasury market and the bond market, and numbers over 150 mean, based on the creator's own interpretation, that the Fed has lost control of the Treasury market. Well, you know, with the softness that we saw in March going into April, it got up to 140. And when it got to that level, that's when you started having a walk-back of the tariffs, you know, a lot of gesturing for the market and lip service, the reprieve on the 90-day pause for reciprocal tariffs. Well, what I'm noticing, Cris, is that the MOVE index has come down to as low as, I believe, around 105 last week. What I'm noticing, Cris, is that the MOVE index is starting to move up, and it's moving up with deteriorating economic data, and it's not confirming the stock market's move anymore. So, that's what I'm looking at near term, Cris. And that's kind of what has caught my eye for the last week or so.
Cris Sheridan:
So, I'm going to post a number of these charts that we're discussing, particularly when it comes to credit market indices that you look at. And again, the credit markets, when you're talking about credit default swaps, these are insurance against the risk of default. And as you're saying, when you look at the credit default swap market right now, the credit markets more broadly, they are diverging from the stock market. The stock market has bounced very strongly from the lows that we saw in prior weeks. But the credit markets are a bit more subdued.
Chris Puplava:
Correct. And another chart we'll be posting is one of U.S. Polymarket and the odds of a recession in 2025 relative to the S&P 500. And in the chart, I have the odds of recession inverted so that when it rises, it's actually flipped. So, it looks like it's directly correlated with the stock market when they're inverse. But what you'll clearly notice is the odds of recession in 2025 mimic what the S&P is doing on an inverse relationship. And what we can see is in the last two weeks, and again, this is when things are starting to diverge from the stock market. Meaning, as I mentioned, two weeks ago, credit default swaps stopped improving. No more rally, no more improvement. They started going sideways. And also noticing the BofA MOVE index is starting to tick back up a bit, and the spread between distressed debt and junk debt is starting to move up. Well, what happened two weeks ago is the odds of recession started to pick back up. They got as high as about roughly 65% when the market bottomed, and they fell back to, I would say, the lowest they fell to, about maybe 46%, 45%. Well, they're back up to 63%. This is literally where they were when the market was roughly a thousand points lower on the S&P. So, there is a huge difference here in terms of, you know, the market pricing recession risk. And yet, the stock market is blindly, blissfully advancing as if there's no risk of recession at all. So, I think the risk is the stock market plays catch-up to the downside. And that's really what I'm considering and looking at over the next week or two.
Cris Sheridan:
Any other items that you'd like to close out today's interview with?
Chris Puplava:
No, I think that's it. I mean, we're going to see what jobs will be, and supposedly we're going to get some more potential trade deals in the next week and whether the U.S. and Europe can come to an agreement and other nations, that remains to be seen. So, again, there's a lot of hope on tariffs, but there's no hope on the economy. And that's economic reality.
Cris Sheridan:
Well, if anything is certain, it is uncertainty. And that was a point that was made by one of our global supply chain experts that we just spoke with. And, you know, she's speaking with many different business leaders around the globe. The uncertainty is very high right now, and that does have a chilling effect on economic activity, not just here for the U.S. but globally as well. So, keeping an eye on the credit markets and what that means for the potential outlook for the stock market is important. Again, you've been doing that and providing these leading insights on what to expect. So, we'll have to see how these things play out. And as we close, Chris, what would be the best way for our listeners to get in touch with you?
Chris Puplava:
If they'd like to speak more about our investment services, they can give me a call at 888-486-3939, or they can email me at chris[dot]puplava[at]financialsense[dot]com.
Cris Sheridan:
Well, Chris, we look forward to speaking with you in another two weeks.
Chris Puplava:
Looking forward to it.
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