Academic journal article ABA Banking Journal

Whistling Past the Graveyard

Academic journal article ABA Banking Journal

Whistling Past the Graveyard

Article excerpt

The mood around the U.S. economic outlook is pretty melancholy. It looks like 2013 will be another year of below-trend GDP growth of around 2%, with a chance that a combination of sequestration spending cuts, federal government shutdown, and uncertainty about the U.S. debt ceiling could further diminish economic prospects. Yet, by merely glancing at financial markets, you would think the economy was finally shifting into a higher gear of sustainable expansion.

For example, look at the equity market. The S&P 500 index is flirting with a five-and-one-half-year high, and has risen nearly 5% over the past month.

Perhaps more impressive is that stock-market volatility is almost unbelievably low right now, given the economic and fiscal risks in the forecast. The Volatility Index (VIX), a measure of S&P 500 volatility, has been trading around 12.5--the lowest since early 2007, and well before the "Great Recession" took hold. The average VIX reading since 2011 is 21.0.

The U.S. equity market isn't alone in this assessment. Equity markets in Europe are up even more than the U.S. market over the past three months.

The hunt for yield and risk carries over into the fixed-income market as well. Ten-year sovereign-bond yields in Italy and Spain have shrunk about 250 basis points since last July. No sign of a Euro crisis here.

Yet, the Eurozone is still in a recession--last I checked--and the IMF just cut its forecast for Eurozone growth in 2013 to -0.2% from a positive 0.2% growth forecast made last October. …

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