After the rough and tumble action we’ve endured through much of the summer, the past few days have been a refreshing change of pace. As I mentioned last week, some major U.S. stock market averages have managed to surpass psychologically-important levels. Moving beyond these levels, however, has taken some time. During the opening half of the week, we witnessed a handful of trading sessions that actually concluded with almost no movement from the S&P 500, the Dow Jones Industrial Average, or the Nasdaq. Evidence of this calmness can be seen from the fear-tracking VIX. The closely-watched benchmark has retreated to 5-year lows.
A number of factors have played important roles in contributing to the recent spell of tranquility. For instance, fears surrounding the EU sovereign debt crisis have subsided considerably following European Central Bank President, Mario Draghi’s, promise to do what is necessary to support the troubled currency bloc. Meanwhile, here in the United States, relatively encouraging earnings action combined with improving economic data has helped to settle nerves. Real estate enjoyed another week of generally optimistic news. Though housing starts came in soft, building permits jumped to the highest level in four years and homebuilder sentiment reached a 5-year high.
Uplifting equity action is welcomed, but should not be viewed as a green light to dive headfirst into risk. There is still a chance that volatility will resurface as the end of summer approaches and, with plenty of uncertainty out of Washington right now, the chance of seeing completely clear skies up ahead is slim.
At first glance, it may appear as though next week will be another quiet one with the bulk of earnings season now concluded and little on the economic calendar. One event to keep on the radar, however, is Tuesday’s release of the Federal Reserve’s FOMC minutes. The comments and outlook from Ben Bernanke and fellow Fed leaders tend to impact market action and could spur some short term volatility. It may be easy to become complacent in this type of halcyon environment, but investors should stay on their toes.
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