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The worst of the stock market crash may still be ahead, according to Wall Street’s ‘Fear Gauge’ signal

Topline

As investors grapple with the worst-performing market in years, some pundits have zeroed in on Wall Street’s so-called fear gauge as an indication that stocks have more downside room, even if major indices are flirting with bear market territory.

Highlights

The CBOE Volatility Index, a measure of expected volatility known as the “fear gauge”, jumped nearly 35 points on Monday as stocks added staggering losses this month, approaching a high of nearly 39 points over 52 weeks in early March, when Russia’s invasion of Ukraine heightened market uncertainty and sent the S&P 500 down 5% within days. Still trading below its March highs even after last week’s “awful” stock market declines, the VIX appears “muted” from recent market stress, a sign that “investors believe a sell-off even deeper could occur in the coming months,” Robert Schein, chief investment officer of Blanke Schein Wealth Management, said in emailed comments.

“If investors truly believed the bottom was near, we would likely see an even higher VIX,” he added, noting that the Federal Reserve’s impending interest rate hikes would be a potential catalyst for further selling. massive.

In a Monday note, DataTrek Research co-founder Nicholas Colas said he would view the VIX closing at 36 or higher “as evidence of a bigger washout in US equities,” which “really should have happened.” produce” Friday, the day after the Dow Jones. The industrial average had its worst day since 2020, plunging more than 1,000 points.

“But that’s not the case,” Colas said of the relatively small VIX, “and so we’re still waiting for an investable fund.”

However, not everyone is bearish on the VIX: Ryan Detrick, chief financial market strategist at LPL Financial, said the recent spike in the VIX could be “potentially bullish from an opposite perspective”, being given that various other sentiment signals are flashing signs of extreme fear, suggesting the tide could be turning as fund managers prepare to buy stocks at low prices.

crucial quote

“While many investors are focused on finding the bottom of the market, we encourage investors to prepare for a sideways trade for a while,” Schein says. “Just because a market bottoms out doesn’t mean it’s right back to record highs.”

Key Context

Fresh off the worst stock market quarter since the Covid downturn two years ago, many pundits are still unconvinced that a recession is in the cards this year. However, some are warning that risks could continue to rise next year as the Fed eases stimulus, signaling more bad news for stocks. In a client note last week, Morgan Stanley analyst Michael Wilson warned that mounting evidence showing economic growth is slowing faster than expected sparked a “particularly vicious” selloff in stocks late in the day. months – and is probably not finished. Wilson predicts that the S&P, which has already plunged 17% this year, could drop another 13% before hitting bottom.

To monitor

Stocks will likely bottom when the Fed signals a pause in its tightening campaign or inflation shows signs of moderating, Schein said. The Consumer Price Index report is due out on Wednesday morning. Economists estimate prices rose about 8.1% last month, down from 8.5% in March, but still well above the Fed’s 2% target. Meanwhile, the Fed is not expected to meet again until June 14.

Surprising fact

Over the past 11 recessions, the S&P has fallen between 14% and 57% from peak to trough, to an average of 27.5%, according to Bank of America.

Further reading

Technical data points to more stock market carnage ahead (Forbes)

Stocks Could Plunge Another 15% After Fed-Spurred Selloff — Will the Economy Fall into a Recession? (Forbes)