Wall Street’s leading measure of investor jitters is at its highest level of the year. The CBOE Volatility Index, a.k.a. the VIX, a.k.a. the “fear index,” spiked nearly 15% at the opening of trading Monday before pulling back for a mid-afternoon gain of 6%.
The VIX measures the implied volatility of the S&P 500 over the next 30 days and began to move up early last week after it became obvious there were major problems with getting President Trump’s health care bill passed in the House of Representatives.
Since his election, investors have been very bullish on the president’s promised corporate tax breaks and infrastructure spending. The S&P 500 has risen more than 9% since early November, though it has cooled off a bit after hitting an all-time high earlier this month.
But following the failure of Trump’s health care bill on Friday (something he said would easily pass), there’s now a whole lot of doubt that the dealmaker-in-chief will be able to follow through on his other promises. Wall Street has been baking future tax relief into stock prices, and now it is pulling back: Since hitting its peak, the S&P 500 is down 2.5% and is on track for its first losing month since October.
Another factor in the VIX’s rise are concerns about the pace of the Federal Reserve’s interest hikes later this year. When the Fed announced a rate hike earlier this month, many market watchers were looking for the central bank to boost its timetable for future rises. Instead, the Fed only signaled two more increases this year and three more in 2018. More rate hikes would indicate the Fed thinks the economy is stronger, so the fact that the timetable wasn’t moved up suggests to many that things aren’t going as smoothly as they could be.
It is worth noting that although the VIX has been rising, it is currently trading at about 13.75, which is still below its historical closing average of around 20. And it’s nowhere near the level it was at the beginning of the financial crisis in October 2008, when it shot up to more than 190% in two months, peaking at over 59. Even the run-up to the presidential election, when the index jumped 72% and hit 22 in a matter of weeks, didn’t seem to affect it long term. Within days of that spike, the index was back down near where it started.
As it is now, the VIX is more or less trading at the same level it has been over the last five years. So the sky isn’t falling. It may just be that things are going back to normal.
