The global financial market is presently experiencing fluctuations and increased volatility. The Volatility Index (VIX), more commonly referred to as the ‘Fear Gauge’, indicates these oscillations within the market. Lately, this index has spiked sharply, surpassing the benchmark figure of 16. For investors worldwide, this sudden escalation raises the question, Is this the end?
The current shift in the VIX can be attributed primarily to the impacts of the ongoing COVID-19 pandemic. The magnitude of this global health crisis has resulted in an increased sense of apprehension and uncertainty among investors. This fear, reflected quantitatively through the surge in the VIX, has led to widespread speculation about the end of the financial bull market. However, this apprehension could be misjudged.
While historically, the VIX movements have been associated with market volatility, it is important to understand that a VIX spike is not necessarily synonymous with financial apocalypse. The VIX is a measure of the expected volatility in the S&P 500 stock index over the upcoming 30-day period. Therefore, a VIX spike reflects the market’s expectation of future volatility and does not indicate the current state of the economy.
The VIX, being a forward-looking index, is inherently speculative in nature. Consequently, an increase in VIX could merely be an indication of perceived risk by investors, not a certain prediction of a market downturn. Perceived risk can be influenced by various factors, including geopolitical events, shifts in fiscal policies or economic indicators, or global crises such as the current pandemic. Thus, while a high VIX—specifically above the benchmark figure of 16—induces anxiety among investors, it does not absolutely signify an impending financial doom.
More so, an above-average VIX typically piques the interest of contrarian investors, as it tends to represent opportunities to capitalise on inflated prices. Unsurprisingly, market selloffs are often succeeded by powerful rallies. Thus, a high VIX could suggest potential buying opportunities once the market stabilises.
Additionally, prudent investors utilise the movements of VIX for hedging against market downturns. As the VIX tends to inverse the S&P 500, investors often use an elevated VIX to buy protective options for their portfolio. Such a strategy can offset potential losses if the market were indeed to plummet.
Despite the heightened level of the VIX, it is crucial for investors to analyse the entire economic landscape, not just the fear gauge. A more holistic approach incorporating other economic indicators such as GDP, unemployment rates, fiscal policies, and inflation can provide a more accurate prediction of the market scenario.
With this in mind, the rising VIX should indeed be perceived as a warning – an alert to closely monitor the evolving situation. Yet, it should not be considered a conclusive predictor of a market crash. Essentially, while the VIX indicates an increase in market anxiety, it is not a definitive measure of the end of the financial bull market. However, its recent upward movement serves as a potent reminder of the dynamism of financial markets and the importance of vigilance in turbulent times.