As the U.S. stock market soars to fresh highs, further expanding the stock market bubble, investors have become excessively complacent and over-confident. In a bubble or time of complacency, investors will bid high-yield bond prices to unusually high levels, which causes the spread between high-yield bond yields and investment grade bond yields to shrink. In a bear market or recession, however, investors typically jettison riskier high-yield bonds in favor of safer bonds, which causes high-yield bond yields to surge relative to safer bond yields. The final chart shows the St. Louis Financial Stress Index, which measures how much stress there is in the U.S. financial system. Obviously, we would all rather live in a world with low financial stress instead of high financial stress, but very low levels in the Financial Stress Index tend to be indicative of the conditions experienced during economic bubbles that, ironically, lead to much higher levels of financial stress when they ultimately pop.

Source: Forbes August 30, 2018 19:59 UTC