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Fear subsides, prices rise

My interpretation of the equity rally that has occurred this month is a bit different from David Rosenberg's, who believes that the market is no longer worried about a double-dip recession (even though he remains pretty confident that there will be a double-dip). I think the market is still very worried about a double-dip, only now a bit less so. The yield on 10-yr Treasuries is still extraordinarily low, and to me that is a sign that investors are still very worried about the economy's ability to grow.

I've showed this chart many times in the past, and it remains the case that there is a strong inverse correlation between the Vix (a proxy for the market's level of fear, uncertainty and doubt), and the level of equity prices. At just under 22 today, the Vix is still historically elevated; 12-15 would be a level consistent with a relatively healthy economy. Similarly, credit spreads are still quite elevated. Both are thus signs of a market that is still quite worried about the economy. On the margin, things are getting better, as the Vix slowly subsides and credit spreads slowly narrow. But the level of the Vix and credit spreads is still indicative of a good deal of concern among market participants.

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