On a bustling Wednesday, the buzz surrounding the New York Stock Exchange heightened as news broke about the Federal Reserve’s decision to scale back its consistent reduction of interest rates. Broadcasts from a TV station kept traders and investors on their toes, amplifying the tension in the air.
The market’s response was swift and dramatic, with Wall Street’s well-known fear barometer, the VIX, witnessing its second-largest percentage surge in history. It rocketed up 74%, closing at a striking 27.62, a jump from around 15 earlier in the day. The only spike greater than this was back in February 2018, when a sudden upheaval in funds tied to the volatility index saw a massive 115% leap, pushing the VIX over 37.
The Federal Reserve’s recent announcement left investors uneasy. Instead of the anticipated continuous rate cuts, the Fed plans to reduce rates merely twice next year, a shift from the previous forecast of four cuts back in September. This news sent shockwaves through the market, resulting in the Dow Jones Industrial Average plummeting by 1,100 points, marking its tenth consecutive loss.
For those tracking market sentiments, a VIX value surpassing 20 typically signifies increased fear levels. Yet, throughout this year, the VIX remained relatively low, under the 20 mark, leading some to fear that the market had become too relaxed. The VIX’s calculation hinges on the pricing of S&P 500 options, and such a jump often hints at investors scrambling to buy put options as a buffer against declines.
The year 2024 has seen another notable spike in the VIX. Back on August 5, heightened concerns about a potential U.S. recession and a significant reversal in the yen carry trade triggered an approximate 65% increase, closing the VIX above 38. During that volatile day, it even briefly surged past 65.
Heading into Thursday, the VIX had eased somewhat, stabilizing slightly above the 20 mark, a more than 25% drop from the previous day’s close, yet still reflecting the market’s cautious stance.
