As we have repeatedly said, "Credit anticipates and equity confirms". Last year from Feb to June, credit markets (risk-priced not USD-priced remember) were flashing fundamentally orange-cum-red warning signals of the unreality that was engulfing the nominal price of stocks. We know how that ended as stocks crashed and caught up to credit's weakness. Sure enough, as we have been warning for a month or two now, the same pattern of credit deterioration is occurring this year with equities remaining willfully ignorant of the true reality of a non-QE world. At current levels the credit market is pricing the S&P 500 at around 1275 (which would basically remove YTD/LTRO/Twist gains) but as JPM's efforts extend the credit index losses to better reflect the reality of single-name credit, the situation looks set to get worse. In a QE-world, credit markets remain the only trustworthy 'market' indication of the business cycle.
2012 Credit vs Equity:
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sadly but correctly echoing 2011's credit vs equity performance - as credit remains priced on risk (bps and relative-value) but stocks (in a fiat currency nominal USD basis)...credit remains the only trustworthy market to follow to judge the business cycle...
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Charts: Bloomberg