Markets are collections of people who are making buy and sell decisions that are frequently based on emotion rather than disciplined analysis. I have come to believe that understanding investor psychology is therefore more important than the number crunching that we learned in business school. One interesting measure of investor sentiment is the high yield spread which is depicted below. It represents the extra return that an investor demands for buying lower quality (junk) bonds as compared to U.S. Treasury securities. Investors typically demand a large premium during periods of uncertainty and are content to accept a small increment when they are confident about the outlook.
As you can see, spreads are at or near all-time lows leading to two possible interpretations. First, the outlook is very positive and investors should therefore be content to accept just a little extra return for taking credit risk. The other possibility is that investors are very complacent, perhaps even delusional, a state of mind that is often followed by unpleasant market outcomes. Of course, I do not know which answer will turn out to be correct. However, fifty years of investment experience have taught me not to get carried away even when the outlook is basically positive.