My December 6th blog titled What, Me Worry? pointed out that high yield bond spreads were at or near all-time lows which could reflect a healthy economy, or alternatively, complacency and “irrational exuberance” in the markets. As shown below, spreads have remained at low levels through the New Year.
Typically, Federal Reserve Officials are very circumspect in their comments regarding the markets. However, FED Governor Lisa Cook made the following statement yesterday, “Valuations are elevated in a number of asset classes, including equity and corporate debt markets, where estimated risk premia are near the bottom of their historical distributions, suggesting that markets may be priced to perfection and, therefore, susceptible to large declines.”
There is plenty of good economic news and corporate profits are strong. So, I’m not suggesting that anyone change their investment strategy, but I do believe it is important to keep a level head and stick to quality in portfolios.