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Spread update




Spreads hit a 2-year low on January 8th of this year, and equity prices peaked shortly thereafter. From January 8th through February 8th of this year, spreads rose and equity prices fell. This means that the market suddenly began to worry about the durability and breadth of the recover which began last year. In recent weeks, those worries have been assuaged, and equity prices have risen and credit spreads have come back down, and that process started on Feburary 8th. Reasons? There has been further progress on the jobs front, commodity prices continue to be strong, a catastrophic default on Greek government debt seems to have been averted, industrial production continues to rise, housing seems to have stabilized, the productivity of labor has increased sharply (which further suggests that corporate profitability is very healthy), and manufacturing and service sector activity has picked up, to name just a few. On the political front (sometimes just as important as economics, if not more so, since politics can influence the economy for years to come), the Obama agenda has run into serious obstacles, and the key concern of the electorate is now the size of government and the burdens this places on future prosperity. It is not unreasonable to think that the political tide is turning in favor of smaller government, and it is not unreasonable to think that this is a very big deal.

It continues to pay to be optimistic.

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