The worst of the stock market crash could be yet to come, according to Wall Street’s ‘Fear Gauge’ signal

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As investors grapple with the worst-performing market in years, some pundits have zeroed in on Wall Street’s so-called fear indicator as an indication that stocks have more room to fall, even as major indexes flirt with market territory. bear market.

key facts

The CBOE volatility index, a measure of expected volatility known as a “fear gauge,” jumped nearly 35 points on Monday as stocks posted staggering losses this month, nearing a 52-week high of nearly 39 points earlier this month. March, when Russia’s invasion of Ukraine exacerbated market uncertainty and pushed the S&P 500 down 5% in a matter of days. Still trading below its March highs even after last week’s “ugly” stock market declines, the VIX appears “muted” relative to recent market stress, a sign that “investors believe it may an even deeper sell-off will occur in the coming months,” Robert Schein, chief investment officer of Blanke Schein Wealth Management, said in emailed comments.

“If investors really believed the bottom is near, we would likely see an even higher VIX,” he added, pointing to impending Federal Reserve interest rate hikes as a potential catalyst for further sell-offs.

In a note on Monday, DataTrek Research co-founder Nicholas Colas said he would see the VIX closing at 36 or higher “as evidence of a further crash in US equities,” which “really should have happened” on Friday, the day after the Dow Jones index. The Industrial Average posted its worst day since 2020, falling more than 1,000 points.

“But it didn’t,” Colas said of the relatively dovish VIX, “and so we continue to wait for an investable fund.”

Not everyone is bearish on the VIX, however: LPL Financial Chief Market Strategist Ryan Detrick said the VIX’s recent rally could be “potentially bullish from a contrarian standpoint” given several other sentiment signals. are showing signs of extreme fear, suggesting the tide could turn as money managers prepare to buy stocks cheaply.

pivotal appointment

“While many investors are focused on finding the bottom of the market, we encourage investors to be prepared for a sideways trade for quite some time,” says Schein. “Just because a market bottoms out doesn’t mean it’s headed back to all-time highs.”

key background

Fresh off the stock market’s worst quarter since the Covid recession two years ago, many experts are still not convinced there will be a recession this year. However, some are warning that risks could continue to rise over the next year as the Fed eases stimulus measures, signaling more bad news for equities. In a note to clients last week, Morgan Stanley analyst Michael Wilson warned that mounting evidence showing economic growth is slowing faster than feared prompted an “especially vicious” stock selloff to end of the month, and it’s probably not over. Wilson predicts the S&P, already down 17% this year, could drop another 13% before bottoming out.

What to watch

Stocks are likely to bottom when the Fed signals a pause in its tightening campaign, or inflation shows signs of moderating, Schein says. The consumer price index report is scheduled for release on Wednesday morning. Economists estimate that prices rose about 8.1% last month, up from 8.5% in March, but still well above the Fed’s target of 2%. Meanwhile, the Fed is not scheduled to meet again until June 14.

amazing fact

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

Other readings

Technicals Point to More Stock Market Carnage Ahead (Forbes)

Stocks Could Fall Another 15% After Fed-Driven Sell-Off: Will Economy Fall Into Recession? (Forbes)

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