Goldman Says The Market Will Get More Fearful. This Trade Could Make The Most Of That.

Goldman Says The Market Will Get More Fearful. This Trade Could Make The Most Of That.
Stéphane Renevier, CFA

3 months ago2 mins

You can essentially read investors’ inner thoughts by checking out the VIX, often dubbed the "fear gauge". The reading captures expected short-term stock movements, essentially assessing investors’ sentiment. A high VIX suggests investors are fearful, while a low one hints that investors are confident, even greedy. And right now, with the VIX lounging near multi-year lows, investors seem relaxed… Maybe too relaxed.

But that might not last long. Goldman Sachs says there are two reasons why the VIX may rise until the end of the year, indicating mounting fear among investors.

First, economic risks. Goldman says five economic indicators could, together, significantly influence volatility: unemployment rates, inflation in short-term goods, new orders in the manufacturing sector, the inflation-fueling gap between core consumer and producer prices, and S&P 500 stocks’ changes in cash flows. Based on today's figures for those five metrics, Goldman suggests the VIX should be chilling around the 20-mark, rather than its current spot of 13. A “normal” economic shock could send it much higher, closer to the 30-mark. So in short, the economy's risks might still be flying under investors’ radar.

Second, seasonal factors. Over nearly a hundred years, the VIX has tended to jump by 27% between August and October. That may well be because company bigwigs hustle to meet year-end expectations around then, while investors scramble to analyze earnings reports, analyst briefings, and management’s outlooks for the following year. This influx of information and heightened trading activity results in a higher potential for surprises and greater market volatility during the period.

Of course, a higher chance of the VIX climbing doesn’t mean that it will. But given the whispers of possible market hiccups, you’ll want to be prepared. Long-term investors may be wise to hold their ground or snatch up more of their preferred assets during downturns. But for short-term investors and traders, buying volatility – through a CFD, an ETF, or even an option on the VIX – may be an attractive short-term trade idea. It might also suit those who want to protect their portfolio from a sudden rise in volatility.



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