Market Isn't Worried About Recession — There Is One Way To Know When It Is, Analyst Says

The market is not fretting over the possibility of a recession, according to an analyst, despite concerns over the economy softening.

There is one metric that proves that the U.S. is not headed there, said Nick Colas, co-founder of Datatrek.

“U.S. corporate bond spreads are off their 2024 lows but still down from 2023 and the start of the year,” he wrote in Datatrek’s newsletter. “If this risk-averse market were worried about a looming recession, spreads would be gapping higher.”

The option adjusted spread (OAS) for high-yield corporate bonds have remained at 99 basis points since Sept. 4, according to the Federal Reserve Bank of St. Louis.

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The spread went as low as 88 basis points on June 3 but reached 164 basis points on March 15, 2023.

This spread measures the additional yield investors demand to compensate for the higher risk associated with high-yield (or "junk") bonds compared to the virtually risk-free U.S. Treasuries.

Colas also noted the Atlanta Fed’s GDPNow model continues to show solid economic growth in the third quarter, with a current estimate of 2.5% gross domestic product (GDP) growth and a consistent 2% GDP growth or better since the start of the quarter.

Investors worried about a recession when the S&P 500 dropped 4.1% last week to close at 5,406 points on Friday to mark the biggest drop since the March 2023 banking crisis.

The S&P 500, tracked by the SPDR S&P 500 ETF Trust, has since rebounded, slipping 0.04% to 5,469 points into Tuesday’s late-morning trading.

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