US Stock Market Recap and Forecast – Volatility Drops as Sentiment Improves

Stock prices in the US surged higher, buoyed by positive sentiment, following news that the US Congress had reached a tentative deal to avoid another government shutdown. The Dow Industrial’s were the leaders rising 1.5%, the Nasdaq increased by 1.46% and the S&P 500 index rose 1.3%. The Senate and the House will now vote on the agreement which did not give President Trump the amount of money he requested to build a completed southern border wall.  All sectors where higher, except for real-estate which bucked the trend with a 0.7% loss. Stocks were driven higher by the technology, industrial and financial sector which rose approximately 1.6%. The VIX volatility index, which is known as the fear gauge, dropped to a 4-month low down to 15.3%.

Congress Has a Tentative Deal to Keep the US Government Open

On Monday evening, delegates from the House and the Senate announced that US Congressional leaders reached a tentative deal which would avoid a government. There are several spending bills that will allow the government to remain functional.

The President spoke during the trading session and said he was unhappy that the Democrats did not provide him with the funding he needed to fully complete his border wall. Trump will likely sit back and watch the votes in each house of Congress to see if there are any cracks in the armor. If he is given an opening, he just might allow the government to close again. He will also be carefully listening to conservative talk show host to see how his base perceives these spending agreements. Trump also discussed trade negotiations with China. He said that if he believes a deal was imminent, he would curtail additional tariffs on China.

The spending deal is expected to include $1.38 billion for 55 miles of wall along the border with Mexico. This is less than the 5.7 billion that the President demanded to complete the wall. During a rally in El Paso Texas on Monday the President appeared to have changed his rally cry to finish the wall.  Democrats were unable to close on a deal that would cap the number of detainees held in camps at the border.

Volatility Drops

A clear sign that sentiment is improving is the 4% decline in the VIX volatility index which is a gauge of market sentiment. The VIX measures the implied volatility of the “at the money” strike prices on the S&P 500 index. The VIX dropped to a fresh 4-month low down to 15.3%. The high for the VIX in 2019 is 28% and the high seen in 2018 was 50%. When the market has a sustainable trend, volatility is normally low. During the 2017 rally in US stocks, the high in the VIX was 16% and the low was 9%. Volatility has declined to provide a solid backdrop to a trend, pointing to a higher stock price. Despite the drop in the VIX, anxiety will remain for the balance of the month headed toward the March 1, trade deadline with China.