Friday, May 1, 2009

Financial conditions are improving

It's rather obvious that financial conditions are improving, but Bloomberg has an index that quantifies the improvement, and it is shown in this chart. To summarize, financial conditions today are about 3.5 standard deviations below average, whereas at their worst (October 31st 2008), they were 8.5 times below average. There is still lots of room for improvement, but we are making substantial and very welcome progress. It is this sort of progress—fundamental improvements in financial and economic conditions—that leads me to believe that the current rally in the corporate bond and equity markets is not a "bear market rally" as so many seem to believe.

The Bloomberg Financial Conditions Index combines yield spreads and indices from the Money Markets, Equity Markets, and Bond Markets into a normalized index. The values of this index are z-scores, which represent the number of standard deviations that current financial conditions lie above or below the average of the 1992-June 2008 period.

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