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Today’s market continues the good spirits that prevailed late last week. We noted on Friday that the rally reflected the sudden change to a sanguine mood after a period of relative nervousness. Monday’s inauguration brought a surfeit of executive orders, but since none directly pertained to tariffs or economic policies that might have immediate consequences, stocks and bonds are showing a generally enthusiastic response.
Quite frankly, because of some downgrades to Apple (AAPL), stocks are actually doing better than they might appear on the surface. When the largest company in capitalization-weighted indices (including the S&P 500 (SPX) and Nasdaq 100 (NDX)) is over -4% lower, it has a depressing effect on their performances. At midday we see NYSE advancers outpacing decliners by more than 4:1, and 350 of the 500 stocks in SPX are higher. The only sector showing losses is energy. The idea of “drill baby drill” was discussed in President Trump’s inauguration speech, but the idea of adding supply to an oil market that seems to be adequately supplied at present was not well-received by commodity traders.
One of the stars today is the bond market. We see 10-year Treasury yields falling by more than 5 basis points, which continues the retreat from oversold levels that prevailed last week. I raised the idea in a media appearance last week that a lighter than expected “Day One” could lead to a bounce in bond prices, though frankly the bounce occurred a bit sooner than I anticipated. Interestingly, 2-year yields have barely budged, which tells us that today’s bond rally was more about sentiment and positioning than major changes to near-term Fed rate policy. Lower rates and lack of tariffs have also caused the dollar to sell off somewhat against most major currencies since Friday.
To my mind, the most striking element of the market reaction continues to be decline in the Cboe Volatility Index (VIX). The current level of 15.21 – which would represent the lowest close since the day after Christmas– shows that traders are anticipating relatively placid markets over the coming month. Remember, VIX does not explicitly measure fear, but instead is constructed to portray the market’s best estimate of SPX volatility over the next 30 days. Bear in mind that this period includes the peak of earnings season, an FOMC meeting, and the potential for tariffs against Canada and Mexico to begin on February 1st. Virtually no one expects a rate change from the Fed next week, but the statement and press conference might offer important clues about the timing of future potential cuts.
Keeping in mind that 10 of the past 20 days have featured SPX closes of more than +/- 1%, perhaps we have gotten a bit too complacent. The skew chart below shows that SPX volatilities are down pretty much across the board since last week, but especially in at-money and near-upside options. Could the market be telling us that the easy money has been made?
SPX Index Skew For Options Expiring February 21st, 2025; today (darker pink), last week (fainter pink)
Source: Interactive Brokers