Wall Street's favorite volatility gauge tumbled as a rebound in stocks deepened, with a surge in banks and assurances from global authorities easing concerns that the recent financial tumult would lead to a full-blown crisis.
Call it calm. Or call it calm before the storm.
Whatever the case, the coordinated actions to resolve the banking turmoil have restored a semblance of order for now. Wall Street's favorite volatility gauge tumbled, with the VIX headed toward its biggest two-day plunge since May.
In the run-up to the Federal Reserve decision, traders are betting on another 25 basis-point hike, with officials forging ahead with the battle against inflation and signaling commitment to financial stability.
"This is an easier market backdrop," said Nicholas Colas, co-founder of DataTrek Research. "Expectations of a dramatic about-face for monetary policy are diminishing. Market expectations for near-term Fed rate decisions are now within the realm of the possible. That is good news."
The S&P 500 topped 4,000, extending its advance above the key 200-day moving average. After briefly exceeding 30 last week for the first time since October, the Cboe Volatility Index plummeted to around 21.
All 22 stocks in a measure of U.S. financial heavyweights climbed.
First Republic Bank surged 30% — its best day ever — amid optimism over a new plan under discussion to aid the regional lender.
Not Too Fast
Now the rally in the riskier corners of the market doesn't mean an all-clear at this stage.
To Matt Maley at Miller Tabak + Co., investors should be careful about the conclusions they draw from the recent equity advance as there are at least two ways to look at it.
"One is to think that the stock market is looking past this mini-crisis and sees that the economy (and thus earnings) are going to grow quite nicely once we get past this problem," Maley said. "The other way to look at it is to think that the situation is still quite a dicey one, and the authorities are pumping so much short-term liquidity into the system that the stock market cannot decline over the near term."
Several strategists are indeed growing concerned, with Morgan Stanley's Michael Wilson saying the risk of a credit crunch is increasing materially.
The S&P 500 might find a floor at 3,800, but investors should sell into any rallies if the benchmark reaches 4,100 to 4,200, Bank of America Corp.'s Michael Hartnett wrote.
BofA's latest global survey of fund managers showed a systemic credit event has replaced stubborn inflation as the key risk to markets.
