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Thursday marks one month since the August 5th yen shock. This mini-market panic started in Japan on Monday after the July jobs report and quickly spread to global markets.
That Monday, the Nikkei Stock Average (^N225) plummeted 12%, its biggest single-day decline since 1987, while the S&P 500 (^GSPC) plunged 3%. The VIX Volatility Index (^VIX) soared to 65, its third highest level on record.
But almost as soon as that morning’s selloff ended, a spectacular recovery began. That may be why there isn’t even an agreed upon and convincing event name. By midday in the US on that fateful Monday, the VIX index had already fallen to 30, the biggest intraday drop in history.
By mid-August, U.S. stocks had already erased their losses. But this rollercoaster of volatility highlights some important misconceptions about the VIX. And past price action surrounding the August shock suggests that the stock price is still out of the woods.
The VIX has long been called the “fear gauge” by the financial media (including the media), but this nickname oversimplifies its function. As Steve Sosnick, chief strategist at Interactive Brokers, explained on a recent episode of Stocks in Translation: It will be shown on TV. ”
The VIX measures the market’s expectations for the volatility of the S&P 500 over the next 30 days, calculated from options on the benchmark. This does not account for actual fear, but rather reflects the market’s best estimate of future volatility and often coincides with market fear and panic.
“VIX is the easiest way to quickly hedge short-term portfolios, so it’s a great proxy for (institutional) hedge protection needs,” Sosnick said.
Institutional and individual investors alike can take advantage of a deep and liquid market in VIX futures, ETFs, and options on those products. (However, the VIX itself is an index and, like the S&P 500, is not actually traded.)
Investors may think that a low VIX means the market is stable and there is no need to hedge. But a low VIX is an affordable VIX. “Buy insurance when you can, not when you need it” is a Wall Street adage. Looking back on Monday’s market crash with the benefit of hindsight, the correct strategy would have been to sell the VIX by noon, either by selling short or covering an earlier long bet.
The BofA data analysis team is issuing a historic warning to investors who have already weathered last month’s shock.
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“August vulnerabilities will drive fall volatility (and it is not priced in),” the team said in a note to investors.
The team also noted that from a historical perspective, the VIX tends to rise from August to October, which could be bearish for stocks.
VIX seasonality from 1990 to 2023
The chart above tracks average VIX levels over calendar years using data from 1990 to 2023. A small peak around the beginning of August has already fully captured the Aug. 5 surge that spooked investors. And now is a time when volatility is accelerating and trending higher heading into November.
The bank reminds investors that in previous years, the market did not recover quickly from the August market shock. In August 2007, the earthquake that preceded the global financial crisis occurred. Then, S&P downgraded the US government debt rating in August 2011, and China surprised the world by devaluing its currency, the renminbi, in 2015.
Each of these years saw further declines in stock prices.
However, in the current situation, we believe there is an opportunity. “In our view, the record VIX retracement provides an opportunity to add equity hedges at levels similar to those before the early August shock and ahead of important catalysts ahead.”
In Yahoo Finance’s podcast, Stocks in Translation, Yahoo Finance editor Jared Blikre cuts through the market confusion, loud numbers, and hyperbole to provide important conversations and insights from across the investment landscape to help you make better decisions. Provides the essential context needed to do so. your portfolio. Find more episodes on our video hub or watch on your favorite streaming service.
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