The S&P500 bounced, not unexpectedly, a solid 2.7% last week. But volume plunged, suggesting that once again, this was not a rally fueled by rising investor enthusiasm. Not surprisingly, the VIX index plunged, bringing back the aura of complacency that accompanied the melt up since September 2010.
There was no unexpectedly good news in the economy last week. Existing home sales shocked observers when it plunged almost 10% in February (vs. January). Adding to the pain, median home prices fell over 5% (year over year). Even worse, new home sales fell off a cliff. The fell 17% from January and a whopping 28% from last year to notch the lowest ever reading in this statistic. Durable goods orders fell, when they were expected to rise. Initial jobless claims met expectations. GDP for the fourth quarter in 2010 was bumped up to 3.1%, as expected. And consumer sentiment fell more than predicted.
What’s most shocking about the rise in the stock markets last week was the horrific backdrop of geo-political events around the world.
The nuclear disaster in Japan is getting worse. Nobody really knows how badly the nation of 125 million will be poisoned by radiation; but the radiation spread is far from contained. The Japanese stock market crashed–literally. The Portuguese government fell. And Portugal’s sovereign debt reached lifetime high yields. So did Ireland’s sovereign debt. The Canadian government fell. Oil prices jumped another 3%, reaching multi-year highs. The Libyan war (pardon, no fly zone enforcement) is raging. The dictator of Yemen is teetering. Bahraini unrest is growing. The ruling family in Bahrain is killing protestors, and Iran is threatening to defend them. New unrest is brewing in Syria and Jordan. And a slew of rockets were fired into Israel.
And there’s more!
But despite all this turmoil and litany of reasons to sell, the US stock market jumped by a remarkable percentage.
In fact the battle wasn’t even close. Last week, the Fed won. Pure and simple.
The money printing machine—also known as QE2—is still fully operational. And its effects worked wonders for the risk markets. Hell and high water were threatening, yet the Fed’s “forces” overcame the global threats, every last one of them.
Because the end is near. The QE2 “forces” are on schedule to be wound down in about two months. In fact, Fed representatives made several announcements recently to remind all the party goers that they mean it–QE2 will end as originally scheduled.
Then we’ll finally see how the global threats–all of which are raging–will truly affect the stock markets, without the defensive force field of the Fed acting to neutralize them.