Jonathan Christopher

Pullback Time? There's No Better Predictor than Credit Spreads

I'd like to play the "Devil's Advocate" for a minute.
Widening credit spreads are primarily due to two factors: Banks still see a lot of risk and have low capital reserves. That means that credit spreads will rise. Secondly the banks and other lenders see that the Federal government is on a spending spree, with the federal debt possibly doubling under the Obama administration, leading to as much as 50% total inflation (over the next few years) as a result of monetary expansion. So these widening spreads may be more due to factors we already know, and not because the economy will tank.

On the positive side, new housing starts are now below "replacement" by about 250,000 units per year. With a growing population and decreasing housing stock, People will either need to rent or buy those empty homes, double-up with relatives, or live in the streets. While an additional two million people living in the streets is possible, I doubt it will happen here. That will result in house prices firming, though there may still be some drops in prices in many areas.

However, I will admit that looking at inflation adjusted S&P averages over the past 100 years suggests that we have not yet reached the bottom of the current "long cycle" in stock prices. Look up "Kondrateif Cycle" for more information on the long cycle.