Recent events and macroeconomic issues may cause many to expect market volatility moving forward. In addition, high inflation (7.5%) is above the Federal Reserve's 2% target and there is an expected increase in interest rates. If we then combine this with supply chain constraints, the ongoing pandemic and Russia’s invasion of Ukraine, then you would expect a recipe for disaster. However, the S&P 500 has barely moved, down just 2.9% over the past month, having rebounded from it’s 6% decline.
What is the VIX?
The VIX, or volatility index, is a method of measuring investor sentiment in the market. This is derived from the prices of the S&P 500 (SPX) index options with near-term expiration dates. Spikes in the index have been previous indicators of stock market volatility, corrections and crashes.
The VIX spiked 9% on Monday and has risen 17% over the past five days. It now stands at 33, the same level it was during the first inflation spike in January 2021 and then in December 2021. However, it has not yet reached the high of 66, which occurred during the 2020 stock market crash. Thus, there is no need to panic at this stage, but awareness is key and it does seem to be at correction levels.
Fear & Greed Index
Another way to measure current sentiment is CNN's Fear & Greed Index, a compilation of seven different indicators that measure some aspect of stock market behavior. These indicators are:
- Stock Price Momentum
- Stock Price Strength
- Stock Price Breadth
- Put and Call Options
- Junk Bond Demand
- Market Volatility
- Safe Haven Demand
The indicator has hit 33 on the fear gauge, but the good news is this is at similar levels to what we saw a month ago.
Buffett Indicator
The Buffet Indicator, which measures the total market cap of the stock market over gross domestic product, is significantly overvalued (currently at 184.5%) based on historical figures.
Moving forward
The main market suppression force right now is inflation and a suspected rise in interest rates. The irony is the Russia-Ukraine conflict actually pushed back the expectation of rising interest rates, at least until later in the year. I believe these two forces have counteracted each other, which is why we are seeing only minor market declines so far.
Vladamir Putin has put nuclear forces on high alert, but has simultaneously agreed to peace talks at the Belarus border. Overall, this is a positive sign and I believe Putin’s threats may act as a deterrent and encourage Ukraine to surrender. However, anything can happen and, given an overvalued stock market, a prudent cash position moving forward seems smart. This can then be deployed should volatility spike even more.
