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Financial fundamentals continue to improve

This index of financial conditions is very comprehensive (see the components listed in the above chart), and—no surprise—it is highly correlated to the Vix index of implied equity volatility. Financial conditions—call it the financial fundamentals of the economy—are still not back to normal, but they have improved substantially since October 2nd last year, when the S&P 500 hit its low for the year. The chart below is a closeup comparison of the Bloomberg Financial Conditions Index and the S&P 500 index, and it shows they have been very tightly correlated (about 0.9 over the past year). This is one more reminder that the health of financial markets is an essential component of the economy's ability to grow and prosper. As financial markets heal, they lay the foundation for healthier growth to come.

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