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Notable comebacks








The S&P 500 index is still about 20% below its 2007 all-time high, but as these charts show, there are a lot of key financial indicators which are at or very near all-time highs. Copper is now at an all-time high, as are a variety of industrial commodity prices (first two charts). The CBOE index of technology stocks is at a post-2000 high, while the S&P 500 consumer staples index is with just a few percentage points of an all-time high (third chart). The VIX index of implied equity option volatility is almost back to its pre-crash lows (fourth chart), and it shows how the decline in fear and uncertainty has helped stocks in general to recover. The Dow Transports index is within shouting distance of new all-time highs (fifth chart). Finally, 5-yr swap spreads (six chart) long ago made a complete recovery (swap spreads are very good leading indicators of economic and financial market health, as I have noted many times since late 2008), and swap spreads continue to suggest that the economy too will make a complete recovery sooner or later.

These recoveries stand in sharp contrast to the still-depressed levels of financial and homebuilders stocks, which is another way of saying that the 2008-9 recession's wrath was concentrated in just a few sectors of the economy (next two charts, respectively). The devastation in housing and banking was so great that it will take many years to fully recover, but this is no reason to be pessimistic about the economy's medium-term prospects.




At this point it seems quite likely that Congress will pass legislation which extends the Bush tax cuts for all taxpayers, and that will remove one more barrier to an eventual, full recovery because it reduces uncertainty and it improves the incentives to work, risk-taking, and investment. It also marks a sea-change in Washington's attitude towards the private sector, and that is a very welcome return to policies that are more likely to foster rather than retard growth. It highlights the fact that higher tax rates are not the remedy for our budget ills, so it will put inexorable pressure on Congress to rein in spending. As I noted in a post last week, continued economic recovery will boost tax revenues automatically, without the need for higher tax rates, so simply holding the line on spending is quite capable of balancing the federal budget within 5 years. The future is hardly grim, and there is plenty of reason to think that the economy and the country can get back on a prosperity track before too long.

Two years ago, the prospect of a full economic and financial market comeback was so remote as to be almost unthinkable. Now, it's just a question of how much longer it will take. That's probably the biggest comeback I can think of.

UPDATE: One more chart (below) that shows the impressive comeback in retail sales, now truly just inches from a new record high.

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