The Stock Market’s Fear Gauge Is Startlingly Low, And That’s … A Bit Worrying

The Stock Market’s Fear Gauge Is Startlingly Low, And That’s … A Bit Worrying
Reda Farran, CFA

6 months ago2 mins

The VIX, popularly known as Wall Street’s “fear gauge”, measures the implied volatility of the S&P 500 based on options that expire in the next 30 days. It’s one of the best ways to assess the level of concern in the market. A low reading indicates tranquil markets, whereas a high one indicates investor panic. And a few days ago, the VIX fell to 13.5 – its lowest level since January 2020, two months before a pandemic would shut economies around the world and spook financial markets.

A VIX reading this low usually indicates extreme calm, and often coincides with rising stock prices. And that tracks: powered by a handful of tech stocks, the S&P 500 returned to bull market territory last week after surging more than 20% from its October low. What’s more, the last time the stock index experienced a one-day drop of more than 1% was February 3rd.

But a very low VIX, in and of itself, can be a warning sign too: it’s what happens when investors become complacent and start to ignore downside risks. And there’s no shortage of risks these days, from the future direction of interest rates and inflation, to falling economic growth and growing strains within the banking system.

Bond markets, in comparison, are relatively turbulent. The Intercontinental Exchange’s MOVE index of implied volatility, which is to bonds what the VIX is to stocks, is flirting with levels typically associated with crises. The index has come down from the highs it hit in March following the collapse of Silicon Valley Bank, sure, but it remains 60% above its ten-year average.

As for what this all means for you: well, keep in mind the old Wall Street saying that the bond market is always smarter than the stock market. If that's true, then, you may want to exercise some caution right now. That is, make sure your portfolio is well-diversified, holds some cash, and doesn’t contain leverage. There may be volatile days ahead.



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