While we are in the late innings, there is probably a little more upside to spread product.
-Mark Luschini, chief investment officer, Janney Montgomery Scott
Since the financial crisis, the Fed has aggressively intervened in financial markets
to avoid a slide into debt deflation. Consequently, corporate bond spreads have
steadily tightened. And the open-ended nature of the latest FOMC asset purchase
program, combined with a shift toward more explicit outcome-based guidance
should continue to benefit corporate performance.
Even though spreads are now closing in on their post-crisis lows, the search for
yield and an active Fed probably means additional outperformance. We have
some concerns about the fiscal cliff, though. While an aggressive Fed provides a
firm tailwind for risk assets, additional monetary stimulus cannot offset
significant fiscal contraction next year. We feel that the full fiscal contraction
implied by current law (about 4% of GDP) will be avoided, but some fiscal drag
remains likely, on the order of 1-2%, no matter the outcome of the election.