While most people are focused on the carnage in the stock market, scarier signs are emerging from the credit market. Currently, the S&P 500 (SPY  ) is off 20% from its all-time high around 3,400, putting it in bear market territory and negating gains from the last 2 and a half years. Although, there will be vicious oversold rallies given extreme selling, action in the credit market suggests that a V-shaped rebound is unlikely.

In December 2018, markets had a V-shaped rebound from the 2,400 level on the S&P 500. Over the next 14 months, stocks trended higher with low volatility. However, the issues causing weakness at that time were the Fed's hawkish stance and the brewing trade war between the U.S. and China. These issues were much more easily resolved than current problems.

Spreads

Credit spreads are spiking to levels last seen during the financial crisis in 2008. Companies with weak balance sheets are seeing the biggest losses. Low yields will pressure banks and make them raise credit standards, making it harder for companies with weak balance sheets to get funding. This is even more pronounced in the energy sector due to crude oil falling more than 25% to levels where many projects are not viable.

In the earlier part of the selloff, weakness was concentrated in high-yield bonds (HYG  ) of which energy makes up more than 25%. However, now it has also begun to hit investment-grade bonds (LQD  ) with that group 5% lower on the day. It signifies that the corporate bond market is pricing in increased credit stress and a decline in economic activity.

Low Yields

Yields are plummeting with the 10-year yield hitting 0.50%. In October 2018, they were north of 3%. This suggests that investors are anticipating a low-growth and low-inflation environment in the future. And they are more concerned about "return of capital" rather than "return on capital". Falling yields have also resulted in an inversion of the curve, where short-term and long-term rates have converged.

As mentioned, low yields will also put downward pressure on bank earnings. Just take a look at how Deutsche Bank (DB  ) or Credit Suisse (CS  ) has been dead money since the ECB went to negative rates with many countries' debt yielding a negative amount. While the large Wall Street banks have multiple sources of revenues, the hardest hit will be regional banks whose primary profit continues to be the spread between borrowing and lending. Another source of earnings pressure will be the wave of mortgage refinances in which borrowers will pay back their loans early in full and then banks will lend to them at lower rates.

Conclusion

Ultimately, the issues facing the economy and markets are much different than December 2018. These problems were political and people-driven, and credit markets weren't too worried even with stocks 25% lower between October 2018 and December 2018. This time, stocks are 20% lower, and credit markets are very worried.