Not Just Nvidia, Market Turbulence Escalates Amid Vix Spike Over 150% – Where Is It Heading?
Last week's market turbulence spilled into Monday, leaving investors on edge as the major U.S. stock indices braced for another volatile day. The CBOE Volatility Index, or VIX, surged over the key 50 level before the market opened on Monday, marking its highest level since April 2020. So much so that futures on the Cboe Volatility Index have inverted, a signal that the here-and-now uncertainty is higher than that further down the line. This spike has prompted a flurry of activity among market participants, as fears of a potential recession continue to mount.
Market Performance and VIX Surge
Last Friday's jobs report, which indicated a sharp slowdown in employment growth for July and an uptick in the unemployment rate to 4.3%, along with sent shockwaves through the market. The $Nasdaq Composite Index (.IXIC.US)$ fell into correction territory, down more than 10% from its record high, while the $S&P 500 Index (.SPX.US)$ and $Dow Jones Industrial Average (.DJI.US)$ were 5.7% and 3.9% below their all-time highs, respectively.
The VIX, often referred to as the "fear index," rose sharply over 50 mark. This jump followed a settlement at 23.4 on Friday, up significantly from levels below 17 it has been for the most part of the year. The VIX, based on options prices tied to the S&P 500, measures market expectations for volatility over the next 30 days. Historically, the VIX has spiked during periods of market uncertainty, reaching an all-time high of 82.69 in March 2020 during the onset of the COVID-19 pandemic, and previously hitting 80.86 during the 2008 financial crisis.
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In the wake of these developments, several semiconductor stocks, including $Intel (INTC.US)$, $NVIDIA (NVDA.US)$, and $ASML Holding (ASML.US)$, reached a 100% implied volatility (IV) percentile, meaning the IV is at its highest level over the past 1 year. Blue-chip stocks like $Salesforce (CRM.US)$ , $Cisco (CSCO.US)$, $Walmart (WMT.US)$, and $Home Depot (HD.US)$ also saw volatility reaching the highest levels in a year.
The volatility in Nvidia shows how confused investors are right now,” said Matt Maley, chief market strategist at Miller Tabak + Co. "They're worried that the huge capital investment into AI will not create the kind of return on investment that people have been hoping for over the past year."
The sell-off wasn't confined to U.S. markets. Japan's Nikkei 225 and Topix dropped over 12% on Monday, marking the worst day for the index since "Black Monday" in 1987, and confirming a bear market. South Korea's Kospi Index also fell 8.77%, triggering circuit breakers that halted trading temporarily.
Reasons Behind the Sell-Off
The recent market volatility can be attributed to multiple factors. Concerns about the Federal Reserve's timing on interest rate cuts following weak jobs growth have heightened market anxiety. "The fact that we had such a huge spike in volatility on Friday is emblematic of the end of a short-term negative move in the stock market," said Steve Sosnick, chief strategist at Interactive Brokers LLC. However, he cautioned, "It doesn't necessarily tell you about the long-term cycle."
There is also a debate among economists and strategists about the underlying health of the U.S. economy. "The U.S. consumer is still in a relatively healthy, fairly normal position, which means the U.S. economy is relatively secure," said Samy Chaar, Chief Economist at Lombard Odier. However, Hani Redha of PineBridge Investments, which sold stocks on Friday, warned, "The risk-reward is not attractive here yet, given the initial conditions, which were stretched."
Another potential reason for the sell-off is the unwinding of the JPY carry trade. Minutes from a June Bank of Japan policy meeting revealed that at least two board members called for an early interest rate hike, signaling a hawkish stance that could lead to further increases. This caused a sharp appreciation of the yen, which has been a key driver of global markets. Cedric Chehab, global head of country risk at BMI, noted that the hawkish Bank of Japan "caused an implosion of the carry trade over a short-term basis," which, combined with weak U.S. manufacturing data and volatile earnings reports, has contributed to the recent market downturn.
Outlook and Potential Outcomes
Historical Performance
Historically, a rapid spike in the VIX has often been followed by a period of falling volatility and rising stock prices. When the VIX index experiences a sharp increase—such as the one triggered last Friday, where it jumped 95% from its bottom within a year without a 20% pullback—historical data suggests that the VIX tends to decline by an average of 11% in the following week and 34% over the next year. Concurrently, the S&P 500 typically sees an average increase of 2% over the next month and 12% over the next year. This historical pattern provides a glimmer of hope for investors looking for a rebound.
Some analysts maintain a cautiously optimistic outlook.
Claudia Sahm, a former Fed economist, argues that despite recent labor market weaknesses, household income and consumer spending remain resilient. "I’m not concerned right now that the U.S. is in a recession," she told Fortune, while acknowledging that economic downturns can build slowly before intensifying.
Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, also advises caution but does not foresee more than a 5% to 10% market decline. "I think we’re going through a pothole, and we’re going to stick the soft landing on the other side," she said, recommending investments in value and cyclical sectors, particularly financials and utilities. Financials have gained in the second half of election years, no matter which party wins the White House. RBC data shows strong, mostly double-digit gains for the sector in the second half of presidential election years going back to 1992. The only year with a decline in the sector was during the financial crisis in 2008.
Conversely, some strategists warn of more significant risks ahead.
Bank of America strategists noted that the market is overdue for a pullback, particularly as we enter August and September, historically weak months for the S&P 500. "We also find ourselves heading into August and September, a period accompanied by seasonally weak S&P 500 returns. With the U.S. election in November, we note that prior presidential election years have seen the VIX increase by about 25% from July to November," the strategists wrote. They do not forecast a bear market in the near future but emphasize the potential for increased volatility.
Bill Gross, known as the "Bond King," expressed a bearish view, suggesting that investors should consider selling recoveries rather than buying dips. "There are very few 'bull stocks' right now," Gross commented, pointing to vulnerabilities in sectors like pipeline master limited partnerships, banks, and financials. Tanvir Sandhu, Bloomberg Intelligence’s chief global derivatives strategist, also noted that elevated realized volatility could limit how much leverage funds use in a rally, further complicating the market outlook.
In summary, while the recent sell-off and spike in volatility have rattled investors, the long-term implications remain to be seen. With differing opinions on the state of the economy and potential Federal Reserve actions, investors must navigate a complex and uncertain landscape in the weeks ahead.
Source: Bloomberg, Reuters, CNBC
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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