Credit-Equity Decoupling

This chart is kinda interesting. It is also kinda dumb, because the things it plots -- investment grade credit spreads on the y-axis, and the absolute level of the S&P index on the x-axis -- don't really have much of anything to do with each other. Nevertheless, what it does indicate is that the relationship between equity and credit markets has recently changed dramatically. The grey dots are points generated since the beginning of the subprime conflagration last July. Not only do they occupy a different area, but their trendline has a different slope. The question, naturally, is whether this suggests that credit worries are overblown, or that equity markets are drinking the kool-aid (these are not mutually exclusive). Frankly, I think that when you consider the fact that corporate profit margins are at multi-decade highs, wages at multi-decade lows, home prices are falling more than 10% per year, and we are pretty clearly heading into a recession that if history is any guide will be serious -- if you consider all this, you might consider the S&P at slightly above its historical mean PE somewhat overvalued.