Stock volatility may pick up in June after ‘cracks in the ice’ formed in May

A widely watched market-volatility measure climbed nearly 10% on Monday, and volatility may ramp up in June after proverbial “cracks in the ice” formed in equities in May, according to CFRA.

The CBOE Volatility Index (VIX) rose as much as 9.2% during the stock market’s first June trading session and was recently up 8.5%. Meanwhile, the S&P 500 (SP500)(SPY) fell 0.5%. Stocks in June typically see below-average volatility and returns, but that could change this year, Sam Stovall, chief investment strategist at investment research firm CFRA, said in a note Monday.

He outlined his short-term view after the S&P 500 (SP500) rounded off Friday’s session with a win for May trade. But he noted the S&P 500 (SP500)(IVV) after rising +5.5% through mid-May dropped nearly 2% through May 30.

“Like a thin film of ice on a pond in early winter, the support from Artificial Intelligence (AI) has cracked under the growing weight of concern surrounding the Federal Reserve and the direction of monetary policy,” he said. AI stocks Super Micro Computer (SMCI) and Snowflake (SNOW) turned lower in May. Nvidia (NVDA) rose but ended off its monthly peak.

The S&P 500 (SP500)(IVV) ended May off its record closing high. Investor confidence had been “rattled” by a rise in the 10-year Treasury yield (US10Y) on a weaker-than-expected Treasury auction and conflicting commentary by Fed officials about rate cuts, he said. Also sparking worries were concerns about a potential rate hike and risks of a recession triggered by the Fed’s higher-for-longer stance on interest rates.

Stovall pointed out that after the Dow Jones Industrial Average (DJIA)(DIA) closed above 40,000 on May 17, value stocks, mid- and small-cap benchmarks, and nine of the S&P 500’s (SP500) 11 sectors eventually declined. Two-thirds of the 154 sub-industries in the S&P Composite 1500 (SP1500) also fell in price, he said.

“In addition, the felony conviction of former President Trump has added uncertainty to future market action in this election year. These factors could lead to elevated volatility in June,” Stovall said. “Despite these near-term concerns, we continue to expect two rate cuts and higher share prices by year-end.”

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