Wall Street's 'fear gauge' just experienced its third biggest decline ever. What it means going forward
Wall Street's so-called fear gauge recorded a steep slide over recent months. That's good news for investors looking longer term. The CBOE Volatility Index (VIX) has dropped around 35 points over the two months since President Donald Trump rolled back many of his market-roiling tariffs in April. That's the third largest decline in the VIX's history going back to 1990, according to Bespoke Investment Group data, ranking behind periods in late 2008 and mid 2020. .VIX 3M mountain The VIX over the last 3 months As the VIX has retreated, stocks have rebounded significantly from the sell-off seen in the wake of Trump's initial policy unveiling. However, Bespoke noted that stocks' climb of around 20% is relatively small compared to historical performance in the aftermath of slides of this magnitude in the VIX. "Historically, the relationship between the two would suggest a surge of more than 50% over the same period, but stocks are 'only' up 20%," the firm wrote to clients. "That makes this a pretty large outlier between options and the underlying assets they track." Looking ahead, Bespoke said this pullback in the fear gauge can be "bullish" when using a longer time horizon. For example, the largest two-month VIX drops in history have correlated with average moves for the S & P 500 of nearly 6% over the following six months and almost 12% over a year. However, Bespoke warned that traders should be willing to wait, as moves over one and three months are relatively muted. Said another way, investors focused only on near-term action will find a significant tumble in the VIX to be "not very relevant." "In other words, the easy money has been made," Bespoke wrote to clients. "But there could likely be more on the table for patient investors going forward." A short round trip Bespoke isn't the only firm watching the market action following the volatility scare. Essentially, Deutsche Bank said this has been the shortest market plunge on a volatility shock on record. Strategist Parag Thatte said in a note to clients published last week that in a typical volatility-induced jolt, equities take about two months to bottom and then another four or five months to make up losses. This time, however, the stock market has bottomed and clawed back losses in under two months. In past shocks, the S & P 500 would be down close to 10% at this point. But as of midday Tuesday, the S & P 500 is up more than 6% since Trump first announced his plan for broad and steep levies on April 2. .SPX mountain 2025-04-02 The S & P 500 since April 2
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