VIX Craters Last Week, Landing On Low-20s Support, Breach Of Which Can Bring More Good News For Equity Bulls

Reversing the prior week’s weakness, major US equity indices put up strong performance last week. The S&P 500 (SPX), for instance, defended a rising trend line from last March. VIX collapsed, landing on low-20s, a breach of which opens the door to the teens, which should pose as an ideal scenario for equity bulls – for now.

This market is very forgiving – kind of heads I win, tails you lose. Strong data plays to optimism that the US economy will come roaring back this year as more and more people get vaccinated. Weak data keeps the hope alive that the Fed will continue to expand its balance sheet. That is the way it has been for a while.

This was evident last Friday. January was a disappointment. Only 49,000 non-farm jobs were created. Ditto with involuntary part-time workers, which pre-pandemic dropped to 4.2 million in December 2019 – and as low as 3.9 million in July that year which was the low of the prior cycle. Then, they shot up, hitting record 10.9 million last April. The metric improved in the subsequent months but only to reach six million by January, which was still 1.8 million more than in December 2019 (Chart 1).  

Ahead of this, the S&P 500 had already rallied 4.2 percent for the week. Jobs came in below expectations. No matter. The large cap index ended up 0.4 percent on Friday anyway, as bulls inferred this would ensure a smooth passage for President Joe Biden’s $1.9-trillion stimulus package.

By now, there is already plenty of stimulus in the system. Markets, true to their nature, are craving for more. Not every economist is convinced the economy needs additional stimulus – or, from the big picture perspective, if the nation can afford one at all.

In the 12 months to December, the US budget deficit amounted to $3.3 trillion, versus a tad above $1 trillion last March. In all of last year, federal debt went up $4.5 trillion to $27.7 trillion. Early last March, the Fed held $4.2 trillion in assets, which have now ballooned to $7.4 trillion.

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