Investors are gearing up for a prolonged period of volatility after two of the most punishing weeks for U.S. stocks in recent memory.
The 11-year bull market is facing one of its biggest tests yet, rocked by the spreading coronavirus and falling oil prices. The market tumult has sent the S&P 500 down 18.9% from its record through Monday.
Many investors are expecting the turmoil to continue.
The Cboe Volatility Index, or VIX, jumped to about 62 in trading Monday, its highest intraday level since 2008 during the financial crisis, according to Dow Jones Market Data. It closed a 54.46, its highest settle value since 2009. The gauge is based on options prices on the S&P 500 and tends to rise when markets are falling.
The rise in the VIX coincides with heavy selling in the stock market early Monday, continuing a painful stretch on Wall Street as falling oil prices weighed on markets. Trading was halted shortly after the opening bell as the S&P 500 lost 7.6%, its biggest one-day decline since Dec. 1, 2008.
The VIX has jumped higher recently after a period of calm that had brought major U.S. indexes to fresh records in February.
That changed abruptly, and traders have rapidly rejiggered their outlooks for how long the uncertainty in markets can persist. Futures tracking the VIX from March to September of this year have also lurched higher, FactSet data show. It is a sign that many are bracing for the turbulence to last for months and are trying to hedge for even bigger falls in the stock market.
“The volatility market is telling us that investors are panicked and disoriented,” said Matt Rowe, chief investment officer at Headwaters Volatility. “Investors are definitely pricing in a protracted period of high realized volatility.”
Prior bursts of market volatility can offer clues.
UBS Group AG analyzed 27 cases since 1990 when the VIX jumped above 30 (with at least a one-month gap from the previous case). The data show that those events persist an average of 58 days and can range up to 312 days. The S&P 500 has fallen anywhere from 5% to 20% in those periods, according to UBS.
“High volatility markets can linger,” wrote Stuart Kaiser, a strategist at UBS Group in a note to clients on Monday. “The market is preparing for a longer period of uncertainty.”
