Surge in ‘Fear Gauge’: Is the Calm Period for U.S. Stocks Over?

①The threat of a trade war has intensified again, regional bank loans have successively encountered defaults, and doubts about an AI bubble are growing – amid the叠加of multiple uncertain factors, the US stock market has undoubtedly fallen into its most volatile period since April; ②the sharp fluctuations have left many investors on edge, and those previously hyped trades are beginning to face risks…

Cailian News, October 18 (Editor: Xiaoxiang) The threat of a trade war has intensified again, regional bank loans have successively encountered defaults, and doubts about an AI bubble are growing – amid the叠加of multiple uncertain factors, the US stock market has undoubtedly fallen into its most volatile period since April. The sharp fluctuations have left many investors on edge, and those previously hyped trades are beginning to face risks…

From a weekly perspective, although the three major US indices closed higher this week after last Friday’s plunge, the S&P 500 index remains not far from its historical high. However, the abrupt end of the calmest market in years still unsettles traders, with many betting that market volatility may persist.

Against this backdrop, one of the biggest winners appears to be the Cboe Volatility Index (VIX). This well-known “fear gauge” of the US stock market reflects expectations for volatility over the next 30 days by calculating the implied volatility of S&P 500 index options. When panic in the market heats up, traders are typically willing to pay higher premiums to protect their portfolios – meaning that when markets crash, the VIX tends to surge.

This Friday, the VIX index reached an intraday high of 28.99, marking its highest level since the end of April. Although it retreated to near 20 at the close, it remains at a rare high for the year.

Meanwhile, data from Cboe Global Markets shows that investors are heavily buying option contracts that would become profitable if the VIX surges to 47.5 or 50.

Jordan Rizzuto, Chief Investment Officer of GammaRoad Capital Partners, noted, “The list of market concerns is actually growing longer. In the current environment, we should expect higher volatility in the stock market.”

Volatility Awakens in US Stocks

Clearly, the resurgence of US stock market volatility coincides with a time of heightened investor anxiety: recent plunges in regional bank stocks are raising concerns in the credit market, the US economy may be weaker than it appears, and the rekindling of trade war threats could lead to a recession. Some investors have also begun questioning the rationale behind the frenzied bets on AI-related stocks – it was these very stocks that propelled the market from its April lows to new all-time highs.

In fact, just a week ago, when Trump threatened to impose new tariffs, the US stock market had been heading toward record levels. However, his social media posts triggered the worst single-day decline since April, ending a streak of 33 consecutive trading days without a daily move exceeding 1% in the S&P 500 index – the longest period of calm since January 2020.

Friction in the trade sector has led to continued sharp volatility in the stock market this week, even after large banks such as JPMorgan and Bank of America reported strong earnings and indicated that the economy remains robust. By Thursday, as Zions Bancorp announced it was suffering significant bad debt losses and disclosed allegations of fraud against a group of borrowers linked to several other lending institutions, further triggering a sharp decline in the regional banking sector — a sector that had already been hit by the high-profile bankruptcies of auto supplier First Brands and auto finance company Tricolor.

Although many analysts have indicated that the problems emerging in regional bank loan portfolios appear to be isolated, tax cuts and regulatory rollbacks are expected to further boost corporate revenues. However, amid an abrupt ‘awakening’ of volatility, some defensive market rotations are undoubtedly taking place.

Although banks and energy companies are the worst-performing sectors of the S&P 500 Index so far in October, relatively stable sectors known for their high dividend yields, such as utilities, healthcare, and consumer staples, have recently outperformed the broader market.

Meanwhile, some high-risk investments have suffered heavy losses. The price of Bitcoin fell sharply by about 8.7% this week, marking its worst weekly performance since February. Opendoor Technologies, a meme stock that was heavily hyped earlier this year, also plummeted by 5.4%.

What does Wall Street think?

As the volatile week came to an end, some industry insiders still believe that the recent market downturn does not necessarily signal a long-term sell-off — in fact, such a correction might even be welcome given the rapid market rally beforehand.

Matt Wittmer, portfolio manager at Allspring Global Investments, stated that his firm is currently overweight financial stocks such as JPMorgan and Citigroup and has largely maintained its positions through the recent heart-stopping stock market turbulence.

“When such events occur, I think it’s healthy. It shows that the market isn’t overly ahead of itself,” Wittmer said.

However, many market participants are concerned that the current market is particularly vulnerable to shocks — the sustained rise in U.S. equities earlier this year has significantly pushed up corporate valuations, bringing the largest blue-chip stocks to historical highs. They also worry that heightened market volatility may gradually expose issues masked during periods of prolonged market calm.

Rizzuto of GammaRoad pointed out that the current high valuations and concentrated gains in tech giants evoke memories of past frenzies such as the late 1990s dot-com bubble — periods that ultimately ended in stock market crashes.

“This is not a prediction that history will repeat itself, but there are striking similarities,” Rizzuto emphasized.