How does the ASX 200 perform after a spike in Wall Street's 'fear gauge'?
The Cboe Volatility Index logged its largest jump on record. Here's what it means for Aussie investors.
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KEY POINTS
- The Cboe Volatility Index (VIX) logged its largest intraday jump ever on Monday, reaching levels comparable to the 2008 Global Financial Crisis and COVID-19 pandemic
- The VIX hit a session high of 65.7, a 178% increase from Friday's close, before easing to 38.5, the highest level since October 2020
- Despite near-term market volatility and increased recession risks, strong corporate earnings and positive long-term trends suggest maintaining a long-term bullish outlook
Wall Street's most-watched gauge of investor anxiety – the Cboe Volatility Index – logged its largest ever intraday jump on Monday and hit levels comparable to the 2008 Global Financial Crisis and COVID-19 pandemic.
The Volatility Index (VIX) hit a session high of 65.7, up 42 points or 178% from its close last Friday. The Index eased towards session close at 38.5, a level not seen since October 2020.
How does this compare to prior spikes?
In terms of intraday changes (from previous close to session high), this was the largest move on record.
Date | Open | High | Close | Prev Close vs. High % Chg |
|---|---|---|---|---|
5/08/2024 | 23.4 | 65.7 | 38.6 | 181.1% |
5/02/2018 | 19.2 | 38.8 | 37.3 | 126.1% |
24/08/2015 | 51.0 | 53.3 | 40.7 | 90.1% |
27/02/2007 | 12.1 | 19.0 | 18.3 | 70.5% |
6/05/2010 | 25.9 | 40.7 | 32.8 | 63.4% |
27/01/2021 | 23.8 | 37.2 | 37.2 | 61.6% |
2/08/2024 | 20.5 | 29.7 | 23.4 | 59.6% |
26/11/2021 | 26.6 | 29.0 | 28.6 | 56.1% |
11/06/2020 | 30.5 | 42.6 | 40.8 | 54.4% |
24/02/2020 | 22.3 | 26.4 | 25.0 | 54.3% |
The moves from prior years don't even come close to last night's move. Some of the prior moves were triggered by:
5 February 2018 – Short volatility trade below up
24 August 2015 – Mysterious flash crash
27 February 2007 – Chinese market crash, Taliban assassination attempt on US VP
6 May 2010 – Flash crash due to massive single selling order of S&P contracts
From a daily change perspective (from previous close to session close), this was the second largest on record.
Date | Open | High | Close | Day % Chg |
|---|---|---|---|---|
5/02/2018 | 19.2 | 38.8 | 37.3 | 117.5% |
5/08/2024 | 23.4 | 65.7 | 38.6 | 64.9% |
27/02/2007 | 12.1 | 19.0 | 18.3 | 64.2% |
27/01/2021 | 23.8 | 37.2 | 37.2 | 61.6% |
26/11/2021 | 26.6 | 29.0 | 28.6 | 54.1% |
15/11/1991 | 21.2 | 21.2 | 21.2 | 51.7% |
8/08/2011 | 36.9 | 48.0 | 48.0 | 50.0% |
24/06/2016 | 26.1 | 26.2 | 25.8 | 49.3% |
11/06/2020 | 30.5 | 42.6 | 40.8 | 48.0% |
24/02/2020 | 22.3 | 26.4 | 25.0 | 46.5% |
How does the ASX 200 trade after a VIX spike?
The ASX 200's historic performance following significant VIX spikes shows considerable volatility.
Source: Market Index
Here's the average, median and percentage of positive outcomes for the above data.
Source: Market Index
When expanding the dataset to include the top twenty VIX spikes, the historic forward looking performance becomes even more pessimistic.
Source: Market Index
Volatility is the problem
Recent weaker-than-expected US manufacturing and employment data have sparked concerns about economic growth in the market. In light of these developments, Goldman Sachs economists have increased their forecast for US recession risks in the coming year from 15% to 25%. However, despite this near-term turbulence, there remain numerous reasons to remain bullish.
75% of the S&P 500 have reported Q2 earnings and earnings growth currently sits at 11.5%, the highest since Q4 2021
On June 30, the estimated earnings growth rate for the S&P 500 for Q2 was 8.9%. Nine of the eleven sectors are reporting higher-than-expected earnings due to upward revisions in earnings estimates and positive earnings surprises
New York Fed's Q3 GDP Nowcast has been dented 0.6 percentage points after last week's negative data but continues to run at a 2.1% pace
Recent inflation data has been encouraging and the market is currently pricing in a 73.5% chance of a 50 bp September cut
Closer to home, ASX earnings are forecast to fall 3.5% in FY24 but bounce 5.4% in FY25 and 5.3% in FY26, according to Morgan Stanley
But as the above historic data suggests, markets tend to become a little volatile after such a destabilising move. Even if the market low has been established, you can't rule out wild swings and whipsaw action.
The challenge with volatility is that you need to take things one day at a time. The market could stabilise and bounce over the next few days, and kick on thanks to solid corporate earnings and Fed rate cuts. Alternatively, we could continue to see more negative economic data, the Fed cuts too late and markets unravel aggressively to price in a hard landing.
This is the classic crossroad where five experts will say "we're bullish and buying the dip" and five more will say "we're bearish and going full cash". And in a few months' time, you'll never hear from the ones that got it wrong.
The encouraging thing is that the historic data becomes overwhelming positive around the 24-month mark. So the bottom line is – Keep calm, manage risk, don't get caught in volatility and stay long-term bullish!
