Here’s What The Market’s New “Fear Gauge” Says About Fear In 2023

Here’s What The Market’s New “Fear Gauge” Says About Fear In 2023
Reda Farran, CFA

7 months ago2 mins

There’s no shortage of major macroeconomic announcements this week, including key US jobs data and an interest rate decision from the Federal Reserve (the Fed). And while such announcements tend to make investors very nervous, Wall Street’s brand-new “fear gauge” – the 1-Day Volatility Index, or “VIX1D” – shows there’s been diminishing anxiety over macro events of late.

Launched just last month, the VIX1D measures the S&P 500’s expected volatility over the next trading day as a way of gauging short-term fear. Its calculations are based on options contracts on the S&P 500 that mature in less than 24 hours (a.k.a. “zero days to expiration” options). These popular instruments now make up about half of the index’s options trading volume. Investors tend to pile into them when Fed rate decisions or big economic data like employment or inflation are on deck, looking to make quick profits or hedge positions around events that in the past year have swung markets in wide and unpredictable ways.

But investors’ fears around these big macro events have been fading, and that’s demonstrated by the VIX1D’s performance over the past year. As you can see in the chart, this fear gauge developed a habit of spiking a day before either the release of a consumer price index report or a Fed interest rate announcement, but those jumps have become less severe this year. For example, on December 12th, before the newest inflation data was released, the VIX1D surged to 47. By contrast, on April 11th, ahead of the latest inflation report, it closed near 19.

As for what’s behind the downtrend, well, it’s hard to say for sure, but with US inflation softening for nine straight months and the Fed nearing the end of its rate-hiking cycle, the macro picture is less unpredictable and scary today than it was last year. Put differently, with inflation and rate hikes largely in the rear-view mirror, investors are perhaps shifting their focus to more traditional drivers of the stock market, like corporate earnings and valuation levels.



All the daily investing news and insights you need in one subscription.

Learn More

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG