Are the warning signs of the 2018 and 2022 U.S. stock market crashes reappearing? As market breadth deteriorates, Fed tightening and U.S. Treasury supply deal a combined blow, and a liquidity crisis may be approaching.

Liquidity pressures may not yet be visible on the surface of the market, but as market breadth in both the stock and bond markets continues to deteriorate, these pressures are building beneath the surface. The U.S. Treasury's plan to issue another $317 billion in net new Treasury bills before December, combined with the Fed's ongoing monetary tightening, could further worsen liquidity conditions. Market breadth is deteriorating There are many ways to measure liquidity and its impact on the market, but one of the simplest is to look at market breadth. Whether it's New York Stock Exchange stocks or high-yield bonds, the message is the same market breadth is deteriorating. The NYSE Advance-Decline Line has fallen nearly 4% since peaking on August 14. Over the same period, the S&P 500 equal-weight ETF has dropped nearly 5%, while the S&P 500 spot index has fallen only about 2%. This serves as a reminder to investors that a strong performance in the benchmark index does not mean the entire market is strong. In addition, the NYSE McClellan Summation Index another measure of market breadth has recently fallen to its lowest level since the spring of 2025, even breaking below its March 2026 low. At that time, the S&P 500 was around 6,350, while the benchmark index is now around 7,600. Over the past six months, the NYSE McClellan Summation Index has twice attempted to break above 500, but both attempts failed, subsequently falling back below zero. This suggests that the market lacks the breadth and liquidity needed to support the S&P 500's continued rise. The high-yield bond market has shown the same signs of deteriorating market breadth, with its advance-decline line turning downward in recent weeks. Similar damaging moves previously appeared before the stock market declines in late 2018 and 2022. In similar situations in 2018 and 2022, the S&P 500 fell by about 20% or more. Fed rate hikes and Treasury issuance may add pressure This time could be the exception, but the current backdrop is very similar to 2018 and 2022. In 2018, during the Fed's rate-hiking cycle, high-yield bond market breadth deteriorated; in 2021, high-yield bond market breadth also deteriorated on the eve of the Fed's rate-hiking cycle. The Fed has now begun a new rate-hiking cycle, although how much further it will raise rates from current levels remains unknown. This matters because tighter monetary policy should ultimately tighten financial conditions, potentially reducing liquidity. During periods of tightening financial conditions, high-yield bond market breadth has historically deteriorated, making this an important indicator to watch as the Fed attempts to transmit monetary policy through financial markets and the broader economy. The only good news is that the U.S. Treasury plans to reduce the Treasury General Account balance by $100 billion by December 31, from $950 billion on September 30 to $850 billion. This means that in the first fiscal quarter, Treasury bill issuance is expected to decline from $409 billion in the fourth fiscal quarter to $317 billion. However, this still means more than $700 billion in net new Treasury bills over six months, and their cumulative impact still needs to be absorbed somewhere. One place to observe signs of this pressure is the trading volume behind the Secured Overnight Financing Rate (SOFR). That volume has fallen from about $3.5 trillion at the start of the year to about $3 trillion. With funds in the Fed's overnight reverse repurchase facility largely depleted, there is no idle cash in the market to absorb additional Treasury bill issuance. As a result, the funds used to purchase these Treasury bills increasingly need to come from the repo market. As the U.S. Treasury continues to issue more Treasury bills than are maturing, a further decline in financing volume could mean increasing pressure on market liquidity. The combination of sustained large-scale Treasury bill issuance and the Fed's rate-hiking cycle could put greater pressure on liquidity as the market enters October and November. Given that breadth in both the stock and high-yield bond markets has already deteriorated, while secured overnight financing volume is declining, the market may be more fragile than the major indices suggest. If these trends continue, the risk of a much larger pullback in the S&P 500 will rise further.