VIX Rises 24.7% Over 1 Month – “Fear Gauge” Index Scrutinised As Rate Cuts Pushed

Wall Street's CBOE Volatility Index, popularly known as the VIX or “Fear Index,” has experienced a substantial uptick in recent days, prompting widespread attention from investors and market analysts. As of the latest figures, the VIX has seen a 13.24% increase in the past 5 days bringing the cumulative 1 month uplift to 24.70%. This suggests a heightened sense of unease among markets regarding the short-term prospects after coming off 5 year lows just a few short months ago.

The VIX Index, designed to measure the 30-day expected volatility of the S&P 500 Index, is often referred to as Wall Street's “fear gauge” because it typically rises as investors grow more anxious and declines when confidence in the steady market prevails. The surge in the VIX comes amid various global and domestic factors weighing upon market sentiment, including geopolitical tensions, inflation concerns, and shifts in monetary policy.

Year-to-date, the VIX is signalling a market environment that has been considerably more volatile compared to the tranquillity of recent years. However, while such an upsurge has escalated by (37.05% YTD) may ring alarm bells for some investors, the current level of the VIX at around 18 does not intrinsically signal a need to panic. In the historical context, although this marks an elevation in volatility, it is still lower than the peaks observed during periods of intense market distress.

Importantly, the VIX has an inverse correlation with the stock market, as higher VIX levels customarily predict market declines. Yet, it is crucial to acknowledge that the VIX is not a perfect predictor of future market movements but rather a reflection of investors' consensus of expected market volatility, factoring in the range of potential upward and downward movements.

The rise in the VIX, calculated by the CBOE by deriving implied volatilities from prices of S&P 500 options, provides a critical glimpse into the market's anticipation of volatility. This information is especially useful for institutional investors when making asset allocation decisions and can represent opportunities for individual investors, particularly those with a higher risk tolerance, to capitalise on the market's undulations.

While the jolt in the VIX Index indicates a period of amplified uncertainty and requires vigilance from the investment community, it is not universally a harbinger of doom.

Experienced market participants may view these fluctuations as natural market rhythms, adjusting strategies accordingly while keeping an eye on the underlying fundamentals which will ultimately guide the long-term trajectory of the market. There is also the opportunity to use the VIX as a hedge during times of uncertainty.

With the VIX level accepted to indicate ‘high' being 20 not seen since last October, we are certainly closer to the high range of normal now than the lower end (12). Earnings season may give more clues as to the market direction, but it is far more likely that the bigger catalysts will be the Fed. With all eyes on the timeline for expected rate cuts to begin, the consensus continues to get pushed back, with September now appearing more reflective of when these will start.

There is a “real risk” according to BofA economists that the Fed won’t cut until March 2025 “at the earliest, but their expectation remains Dec 2024. Inflation data then may be what really holds the key to markets, and the VIX index through the remainder of the year.

All eyes on the next prints.