What to Expect From U.S. Stocks After Volatility Goes Haywire
(Bloomberg) -- Equity traders jolted by the latest bout of violence on volatility markets can look to recent history for guidance on what comes next. The problem is, they won’t find any definitive signal.
There have been six episodes over the past five years during which the two-day change in the Cboe Volatility Index exceeded the 6.45-point surge seen in the opening sessions of this week that propelled Wall Street’s fear gauge to the highest since January. Some occasions proved the perfect spots to get back into U.S. stocks; other times, the pain was just getting started.
Here’s what caused these bouts of market turmoil and what happened next.
August 2015: Chinese Devaluation Aftershocks
It took time for markets to digest the ramifications of China’s shock devaluation of its currency, but by late in the month stocks were in meltdown mode. On Friday, Aug. 21, the VIX closed above 28, almost 13 points above where it ended Wednesday. Then, on the next trading day, the VIX posted an intraday peak of 53.29, the highest print since 2009. Stocks appeared to recover after the following session, but ended sinking back near those levels the following month. The new year saw a fresh sell-off as fears of a hard landing in China persisted and the Federal Reserve delivered the first hike of its tightening cycle.
June 2016: Brexit Means Buy the Dip
The shock results of the U.K. referendum on European Union membership produced undeniably violent -- and in some instances, unprecedented -- moves across financial markets. Two sessions following the vote, the VIX closed at 23.85, or 6.6 points above where it ended on June 23 as the British people headed to the polls.
Soon thereafter, strategists were proclaiming that the Brexit-related selling was over, and volatility was absolutely crushed. The S&P 500 Index rose more than 8 percent over the next month. In traders’ eyes, the lesson from the reaction to the Brexit surprise was clear: market dips are destined to be bought.
February 2018: Volmageddon
Equity euphoria at the start of 2018 preceded the fall and the record one-day jump in volatility. The fear gauge closed at 17.31 on Friday, Feb. 2, and closed at 37.32 the following Monday, with the surge wiping out some exchange-traded products that let investors bet on enduring calm. Stocks were virtually flat over the next three months.
March 2018: Shaking Off the First Chinese Retaliation
On March 23, the VIX closed at 24.87, or 7 points higher over two days. China had just announced retaliation against tariffs proposed earlier in the week by President Donald Trump, with the nation’s ambassador to the U.S. refusing to rule out the possibility that it would use its Treasury purchases as a negotiating tool.
Stocks struggled shortly thereafter, but not for long: the S&P 500 rose 6.4 percent over the next three months on its way to fresh all-time highs that summer.
October 2018: Powell and Trade Sink Stocks
Stocks were dealt a one-two punch in early October: Federal Reserve Chair Jerome Powell’s comments that the policy rate was a “long way from neutral” was followed days later by news from Fastenal Co. that the trade war was having a larger impact on Corporate America’s profitability than previously thought. The VIX closed above 20 for the first time since April on Oct. 10, with shares falling an additional 16 percent in the weeks ahead. A poor earnings season for some major technology firms and a messy deleveraging by hedge funds amid illiquid markets sent the S&P 500 to the cusp of a bear market by late December.
December 2018: Christmas Gift Coming Soon
After the VIX rose 7.7 points since to peak at 36 on Christmas Eve, this proved to be the bottom for stocks. Wave after wave of frenzied selling over the course of the month finally culminated in a capitulation move. Record highs and the best start to a year for U.S. stocks since 1987 ensued.
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