Market technicians know it as the CBOE Volatility Index, named after the Chicago Board Options Exchange. Informally, however, it’s called the VIX fear index, and by midday today, this volatility gauge shot up 15%. So, what does this mean for stock investors?
When the VIX pierces above 20 like it did today, typically, this means that large-cap stock investors (or more accurately, derivatives traders) expect the S&P 500 to be volatile. Their predictions of future volatility don’t always turn out to be true.
Nevertheless, it’s important to know why the VIX fear gauge is rising. So, let’s see what seemingly good news could turn out to be problematic for large-cap stocks.
Why Is the VIX Fear Index Surging Today?
Here’s the scoop. The latest Job Opening and Labor Turnover Survey (JOLTS) report revealed that, at the end of August, there were 9.6 million available jobs in the U.S. That’s a noticeable uptick from the 8.92 million job openings at the end of July.
That’s terrific news, right? Sure, if you’re looking for a job right now. If you’re a large-cap stock investor, however, you might be feeling some trepidation.
It’s commonly perceived that the Federal Reserve won’t stop raising interest rates until it sees a cooling labor market. That’s because the central bank wants to tamp down inflation.
However, a hot jobs market could prompt the Federal Reserve to continue raising government bond yields. This explains why the U.S. Treasury bond yield jumped today — and why CNN‘s Fear and Greed Index moved into “Extreme Fear.”
Oftentimes, when government bond yields rise, and those bonds become more attractive to investors, stocks become comparatively less attractive and can lose value as a result. Thus, there’s an apparent chain reaction today between a hotter-than-anticipated labor market, rising bond yields and the perceived future volatility of stocks.
What You Can Do Now
Bear in mind the VIX fear index is only a prediction of future volatility in the S&P 500. It’s not a guarantee of a stock market crash.
Still, if you’re worried that rising interest rates will continue to put negative pressure on stocks, you can reduce your stock exposure. On the other hand, contrarian investors might actually choose to lean into the fear. After all, when the VIX spikes, that’s when opportunity strikes.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
