The Dow and the S&P 500 halted a record-setting streak of quarterly wins at nine, and the clearest reason why may be explained by the VIX index, widely known as Wall Street’s “fear gauge.”
The Dow Jones Industrial Average DJIA, +1.07% posted a quarterly decline of more than 2.3%, snapping the longest streak of quarterly gains for the blue-chip average since an 11-quarter rally that ended in the third quarter of 1997. The S&P 500 index SPX, +1.38% booked a 1.2% quarterly fall, ending its longest such stretch since the first quarter of 2015.
There are perhaps a host of reasons for the surcease of such a lengthy bullish run for the most prominent equity benchmarks: The Federal Reserve’s normalization of monetary policy, with the central bank lifting rates for the fifth time this month since December 2015; Intensifying uncertainty in the makeup and agenda of President Donald Trump’s administration, underscored by a number of high-profile departures; and the intensification of trade-war fears, after the president imposed duties on steel and aluminum imports and leveled more targeted tariffs at the world’s second-largest economy: China.
However, the surge in the Cboe Volatility Index VIX, -12.68% is perhaps the most correlated with the market’s downtrend. According to WSJ Market Data Group, the VIX posted its biggest quarterly rise, up 81% since it jumped in the third-quarter of 2011following Standard & Poor’s historical downgrade of the U.S. credit rating and European debt-crisis jitters.
The VIX reflects option traders’ collective expectations for S&P 500 volatility in the coming 30-day period.
Much had been made about the gauge’s subdued readings over the previous 18 months, a period that ended when the index surged 115% on Feb. 5.
Since that period of unnatural calm came to an abrupt end, the index has climbed to trade near its historical average around 19 or 20.
The VIX’s surge in February, which capsized a number of risky trading strategies based on bets volatility would remain subdued, marked a distinct change in the tone and tenor of Wall Street sentiment, representing a return to a regime of higher volatility.
What does it all mean?
Josh Brown, the CEO of Ritholtz Wealth Management LLC put it this way in a Wednesday blog post:
|Josh here—just because volatility has picked up and the market has obviously changed character, that doesn’t mean investors ought to change their own character. Adopting new tactics is better left to professional traders. For investors, the presence of unexpected drawdowns and market dislocations popping up means new opportunities to harvest the imprudence and forced errors of others.|
Of course, its hard to say if the VIX is driving stock moves or if the decline in stocks represents a shift in the volatility dynamic. But one thing is certain: a stretch of extraordinary placidity is over.