Analysts at Goldman Sachs are highlighting an intriguing disconnect between market conditions and the famed 'fear' gauge.

Goldman Sachs' analyst team, featuring experts such as John Marshall and Spencer Hill, CFA, wrote a note explaining that the CBOE Volatility Index (VIX) is presently trading at price levels considerably beneath what the broader economic context would imply.

"The VIX at 13.8 is about 6 points below the 20.6 level implied by the growth and inflation environment, but only 4 points below levels implied by our year-end-2024 estimates," the analysts wrote.

Goldman Sachs Deep Dive

Goldman Sachs' analysis examines the historical underpinnings of the VIX. They examined key macroeconomic variables such as unemployment rates, ISM new orders, consumer spending growth, and inflation.

A number of factors typically appear to be correlated with an increase in equity market volatility:

• Weakness in manufacturing new orders
• Dwindling consumer expenditures
• Rising unemployment
• Disparities in inflation between consumers (CPI) and producers (PPI)

Despite a turbulent period that briefly propelled the VIX to a high of 31 during the regional-bank failures in March, volatility has since taken a nosedive, except for a brief uptick in August, plumbing to 2023 lows as September began.

Currently resting at a relatively modest 14, the VIX seems to have settled comfortably in the lower range of the post-pandemic era, even dipping below pre-Covid historical averages.

This year's staggering 35% decline in the VIX is the second-largest annual drop since the 2009 financial crisis, surpassed only by the 46% plunge witnessed in 2019.

Signs of Turbulence on the Horizon?

Is an undervalued VIX an early indicator of turbulence ahead? There are market participants who seem to believe just that, betting on the fear index to skyrocket from here.

Recently, an unconventional move saw a trader snap up more than 5,000 call options on the VIX, anticipating the fear index to soar to an astonishing 180 levels by February 2024. That's an eye-popping 1,100% leap from its current level.

It's worth noting that the VIX reached its all-time high of 89 during the September 2008 Lehman Brothers crash when the entire financial world teetered on the brink of collapse.

Exchange-traded funds such as the ProShares Trust VIX Short-Term Futures ETF (NYSE:VIXY), the ProShares Trust VIX Mid-Term Futures ETF (NYSE:VIXM), and the ProShares Trust Ultra VIX Short-Term Futures ETF (NYSE:UVXY) provide opportunities to participate in the VIX's movements.

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