The recent market volatility has been nothing short of extraordinary. In mid-December, a significant drop in the S&P 500 (SPX) led to a roughly 180-point decline, resulting in an increased VIX reading from around 15 to 18. Fast forward to the present, and we’re witnessing a similar sell-off that has pushed the VIX above 20.5. This sudden surge in volatility begs the question: what’s driving this response from the VIX?

To begin with, it’s essential to understand the relationship between the VIX and the broader market. The VIX is a measure of the expected volatility of the S&P 500 index, calculated via the prices of options contracts on that index. When the market is experiencing high levels of uncertainty or turmoil, the VIX tends to increase as investors seek shelter in safer assets. Conversely, when the market is calm and stable, the VIX tends to decrease as investors become more confident in their investment decisions.

So, what’s causing this recent surge in volatility? There are several factors at play:

1. Geopolitical tensions: The ongoing conflict between the US and North Korea, as well as the situation in Ukraine, have contributed to a heightened sense of uncertainty in global markets. This has led to increased demand for safe-haven assets such as gold and government bonds, which in turn has pushed up their prices and driven down stocks.
2. Central bank policy: The Federal Reserve’s decision to raise interest rates in December, combined with expectations of further hikes in the future, has led to a shift in investor sentiment. As yields on risk-free assets such as Treasury bonds increase, the appeal of equities decreases, leading to a decrease in stock prices and an increase in volatility.
3. Economic growth concerns: The global economy has been experiencing a slowdown in growth, with several major economies forecasted to experience a decline in GDP this year. This has led to fears of a potential recession, which could further exacerbate market volatility.
4. Market valuations: Stock prices have been trading at historically high levels, leading some analysts to suggest that the market may be due for a correction. With valuations stretched, any negative news can lead to a rapid decline in stock prices and increased volatility.