Market Memo

February 2024 – By Bob Veres

There are periods of market complacency where most investors see nothing but upside from here to eternity, and then there are periods like this, which might be described as extreme complacency.  One measure of how people are feeling about the market is the VIX, often called the investor fear gauge.  The VIX index, which tracks market volatility, normally trades at about 20, and it can go dramatically higher—to a record 82.69 in March of 2020 as people began to realize the implications of the new COVID pandemic.  Today the VIX is trending downward, at a 13 level, despite markets at all-time highs, persistent inflation, and global political instability.

There’s a big business in betting that the markets will remain stable—options-selling funds trading on the VIX have attracted roughly $192 billion in investor assets.  And it’s risky.  In a memorable incident in February of 2018, when a downturn in the S&P 500 sent the markets into a temporary panic, an investment fund with the mouth-twisting name of VelocityShares Daily Inverse VIX Short-Term Note saw its assets shrink, in a single trading session, from $1.9 billion to $63 million.

Most of us are far from engaging in betting on the direction of the volatility index.  But the implications of a below-norm VIX is that the markets could experience an unexpected downturn in the near future, bringing the so-called fear gauge back up to or beyond historical norms.  That doesn’t mean we know when or how this will happen; it just means that investors may need to start preparing themselves for a swing in the roller coaster and know to hold on tight.  Because, after all, we also don’t know when or how the markets will swing back up again afterward.

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