Thought Leadership

Market Review and Outlook 1st Quarter 2005

April 20, 2005

Our last quarterly review focused on the shrinking risk premiums that developed in most markets through 2004.  Two years of aggressively stimulative monetary policies on the part of the world’s central banks, our own prominently among them, left the world awash in liquidity and investors gasping for yield.  Investors responded as they always have, and as the central bankers hoped they would, by reaching for longer-dated and lower-rated bonds.  They also borrowed to purchase new homes and consumer items, thereby driving the global recovery.  Credit spreads narrowed as the stock market surged and emerging markets and high yield debt outperformed.  Central bankers were able to pursue this tactic without generating inflation because the glut in worldwide supply of productive capacity, especially labor, at first made it impossible for businesses to raise prices.  This all began to change in the quarter just ended.