The U.S Stock Market Faces Trouble Due to a Sudden Increase in Volatility

Stock market volatility has resurfaced as a concerning factor, with equities experiencing a third consecutive day of declines. The absence of a 5% or higher pullback in markets since March raises red flags for market performance.

‍

This morning, the VIX Index is trading at 16.9, its highest level in two months, rebounding from a low of 12.7 last week. Though the absolute level remains historically low, the unexpected spike this week could prompt a shift in the market forces that have contributed to this year's rally.

‍

Charlie McElligott, Cross-Asset Strategist at Nomura, cautioned investors in a note to start considering potential risks and the impact on volatility-sensitive systematic strategies. Conditions are approaching a point where mechanical selling or deleveraging risk might come into play.

‍

Investors who focus on risk and volatility control strategies, basing their stock market exposure on market movements, have been active participants in the recent stock market rally. Their buying has played a role in bringing the S&P 500 within 5% of its all-time high. However, if volatility continues to rise, these investors may be forced to reduce their equity exposure, which could reverse the positive momentum in the market.

‍

Gerry Fowler, the head of European equity strategy and global derivative strategy at UBS Group AG, points out that the market's expectations for lower volatility are out of sync with leading indicators. UBS does not anticipate a spike in volatility until 2024, but even then, the levels are likely to be higher than what the market is currently pricing due to a deteriorating macro environment.

‍

As the decline continues, stocks in Europe and futures in the US are experiencing further losses on Thursday, following the S&P 500 Index's first one-day drop of more than 1% in 47 trading days on Wednesday.

‍