The VIX fear index hit its 11th highest level ever as investors come to believe that the Fed has signaled the end of the easy money era. Is this an overreaction or should you be selling stocks right and left? Investor Place comments on how the VIX just misses the top ten most volatile days in a quarter of a century.
The CBOE Volatility Index (VIX), or fear gauge, soared ahead 39.9% on in Friday trading, making it the 11th greatest move in the index in more than 25 years.
Wall Street simply got spooked by worries that the end of the easy-money era is over. But let’s get real-a 25 basis point or even 50 basis point increase in the fed funds rate is hardly going to torch the bond markets and, in fact, would show the Fed’s greater confidence in the U.S. economy’s ability to both weather higher rates and continue to expand.
Despite a 2.1% decline in the Dow and a 2.5% drop for the S&P 500, both indices are less than 3% below the all-time highs set in mid-August.
Their opinion is that the current worry about a small increase in interest rates is much ado about too little. To understand how a small rate increase might signal the end of the easy money era let’s start with the VIX.
The VIX Fear Index
According to Investopedia VIX is the ticker symbol for the CBOE volatility index.
VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking, is calculated from both calls and puts, and is a widely used measure of market risk, often referred to as the “investor fear gauge.”
VIX values greater than 30 are generally associated with a large amount of volatility as a result of investor fear or uncertainty, while values below 20 generally correspond to less stressful, even complacent, times in the markets.
A VIX of 39.9% is certainly in the fear and uncertainty range. Should it be? Is the market at such risk? Normally that might not be the case but when stocks are generally overpriced it could be time for a correction.
Are Safe Stocks Really Safe?
The Wall Street Journal reports fear for the safest investments as the market stutters.
Investors who spent the summer floating serenely on mirror-calm markets have been frantically bailing out the boat in the past two days. Whether the storm that hit U.S. stocks on Friday and spread globally on Monday is the start of something much worse or merely a squall depends a lot on what explains it: the Federal Reserve, global central banks or the unwinding of excessive complacency. Unfortunately for shareholders, the signs point to the latter.
In a normally priced market and with more normal interest rates it would not be a huge deal to see an increase of a quarter percent or so in the Federal Funds rate. The problem is that rates have been historically so for 8 years and the market has come to assume they will remain so. Overpriced stocks, especially dividend stocks that will get hurt with higher rates may be in for a big correction. This pending end of the easy money era is seen in the abrupt rise of the VIX fear index.