The VIX is once again spiking as traders try to parse the likelihood of the Fed’s policy shift stalling economic growth while letting inflation fester.
It’s not a scenario that points to the next few months being anything better than a bumpy ride. The rewards are unlikely to be huge unless you pick great stocks.
And the risks are going to be considerable. Given that calculation, a lot of investors are parking their assets in more stable areas of the market until conditions improve.
As they pull the plug on everything else, volatility accelerates, creating a self-perpetuating cycle of doubt, fear and dread.
But here’s the dirty secret behind the VIX: because it measures Wall Street’s fear as well as ambient volatility, there’s a subjective component.
The VIX is more sentiment than substance. Sentiment is a human factor . . . and as human beings we get into moods where dread takes over.
In these moods, our natural urge to avoid a negative experience (pain, loss, frustration and even boredom) makes us pay a premium for comfort. We sacrifice future returns, leaving easy money on the table.
We sell low. As the VIX rises and falls, it reflects what comfort is worth to the market as a whole at any given moment.
Under “normal” conditions the S&P 500 moves about 0.75% a day. That’s ambient volatility, the real rate at which stocks gyrate around fair value.
And that’s actually where the market has taken us lately. Yes, the NASDAQ has been making much bigger swings on a daily basis, but the VIX doesn’t measure the NASDAQ.
The S&P 500 has actually been only a little agitated this year, moving 0.75% a day in January and then accelerating to 0.8% in February and March.
April started on an unusually calm note, with the broad market only moving half as much as average on any given day so far.
So why is the VIX spiking? Blame the NASDAQ stealing all the headlines and contributing to a sense of frustration and dread.
But even at this level, the VIX shows that the dread just isn’t translating into actual volatility. People are talking a lot about fear. Stocks are barely budging.
The VIX at this level implies that the S&P 500 will wobble an average of 1.5% every day for the next month. If we only see half that volatility in coming weeks, I’ll be surprised.
And in that scenario, half the fear out there is literally just Wall Street trying to scare itself. That’s an opportunity as long as you have a little courage and a little clarity.