"Get your facts first, then you can distort them as you please."
— Mark Twain
What exactly are the equity markets on, anyway?
Really. When you consider the underlying fundamentals to the U.S. economy right now, the fact that the just-completed first quarter yielded such strong results has to give one pause. The thing is, the current market doesn't seem to have a pause button to hit.
Looking at some of the benchmark Indexes, it doesn't take a whole lot of attention to recognize the trend. The Dow Jones Industrial Average (DJIA) gained 6.4% for Q1 of 2011, its best quarterly percentage gain in over 11 years. The benchmark S&P 500 Index (SPX) ended up over 5% for the same quarter, and the Nasdaq Composite Index (NASDAQ) clocked in at 4.8%.
These are staggering numbers in light of the global shocks experienced over the course of this same time frame. It would seem that Japan's horrific travails, the chaos resulting from the wave of pro-democracy activities in the Middle East, and the continued weak performance of the U.S. housing markets would combine to serve as a damper to the exuberance that the markets have recently demonstrated.
It would seem. Yet it has not.
The question to ask is, what exactly is making the markets so robust?
Is it a deep, abiding belief that growth is inevitable? Or, on a slightly more cynical note, is it possible that the big players in the markets are taking advantage of the Fed's largesse in the form of QE1 and its subsequent sequels, and the markets are being pumped up on things of a non-fundamental kind?
Needless to say, there is not a consensus answer to this question, only fragments to be discerned by each investor. Who said figuring the markets is easy? Still, the continued influx to equity markets remains a bit of a baffle, though there is hardly a shortage of opinions as to the reason.
If you are looking for an additional indicator of relative complacency in the equity markets, one may be found simply by glancing at the VIX chart. The VIX, the Chicago Board Options Exchange Volatility Index, measures the expected volatility in markets using options on the S&P 500 Index. The VIX rises as traders seek out protection from down-bound markets. As of late Friday, the VIX was at $17.40, which is well toward the low side of the $15-30 range it has traversed over the course of the last nine months. More greed, less fear. Another way to put this is that currently, the appetite for risk is continuing to occur. The equity markets are apparently a recipient of this sentiment, at least for the moment.
What's occurring in commodities right now, on the other hand, makes a certain degree of sense.
Gold, ending the week at $1,428, continues on its rampage, though not quite as parabolic as it did back in the 2nd and 3rd quarters of last year. Again, this trend makes sense.