Tsunami of Volatility: What Happened?

3 minute read

Volatility has once again reared its head as the “Fear Index,” the VIX, briefly jumped above 65 on Monday. For most of 2024 it has floated around 13-16 and Monday’s move saw levels last seen during two tumultuous times: the Great Financial Crisis and the Great Covid Shutdown. The VIX eventually settled down at 38.6 and has continued to trend back downward to 25 the following day. So what drove investors to this tsunami of volatility?In simple terms, a common trade over the years has been the so called “Carry Trade,” i.e. borrow cheap money in one currency, convert to US Dollars in order to buy US Equities. This was easily accessible for global investors during the zero interest rate environment over the past 15-years. One of the few spots in the world with extremely low interest rates has been Japan. The Bank of Japan has been at zero or negative interest rates since November 2010 (that's not a typo!). Only this past March did they move from negative interest rates to positive interest rates, going from -0.1% to 0.1%. At the end of July the BoJ moved their key short-term interest rate to 0.25%. The timing could not have been worse as the U.S. released a weaker than expected employment report. With fears that the Federal Reserve was now behind the curve on domestic rate cuts, investors began to deleverage their equity positions. The Japanese Nikkei saw a historic “Black Monday” as it declined 13% which led to global markets selling off between 2-3%. The good news is that the following day saw the Nikkei rebound 10% as investors took advantage of the price dislocation. Domestically the S&P 500 saw a 3% decline but is currently on pace to gain 2% post-Monday. 2024 has been relatively quiet as only three days have been recorded so far that have broken a +/-2% daily price change, even as we have seen 38 new record highs for the S&P 500! Over the last 25-years we’ve averaged about twenty instances per year but often grouped together in particular volatile years.

The silver lining with the bout of volatility has been diversification worked. Fixed income bonds held up and alternatives helped dampen overall portfolio volatility.

August 2024 Chart

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