The stock market volatility has steadily declined over the past three years, returning to more normal levels. The Cboe Volatility Index (VIX), often referred to as the market’s “fear gauge,” currently stands at 13, which is in line with historical standards.

Understanding the VIX

The VIX is an indicator of the expected volatility in S&P 500 stock prices. A higher VIX suggests greater uncertainty among investors regarding companies’ future earnings and the valuation of their shares. Prior to the pandemic, the VIX remained relatively stable, often hovering around the low double digits and occasionally dipping as low as 9.

Pandemic Impact on Volatility

However, the outbreak of the pandemic in 2020 led to a significant spike in the VIX, reaching above 60 in early 2020. As the market grappled with the uncertainty surrounding the pandemic’s economic impact, the VIX eventually settled in the high teens.

The Rise and Fall of Inflation

In 2022, economic demand surged following the post-pandemic recovery, which caused a rise in inflation. As a result, the Federal Reserve swiftly raised interest rates in an effort to curb economic demand. This move caused the VIX to climb back above the 20 level.

Returning to Normalcy

Fortunately, inflationary pressures have since subsided, approaching the Federal Reserve’s target range. With this development, it is likely that the central bank will halt its interest rate hikes and potentially even consider rate cuts, leading to a decline in the VIX towards more normal levels.

Overall, the volatility in the stock market has undergone a significant journey, with recent developments signaling a return to stability and investor confidence.

Confidence in the Market: A Smoother Ride Ahead

The recent decline in the 10-year Treasury yield, from its peak of 5% in October to around 4.2% now, is bringing a renewed sense of confidence to the market. While economic growth is expected to slow in the coming quarters, the fact that rates are still below their peak levels is reassuring. It indicates that the economy can continue to grow at a steady pace and avoid a recession. Moreover, this positive outlook also suggests that there is potential for further profit growth.

What’s even more significant is the market’s confidence in rates remaining low. The Merrill Lynch Option Volatility Estimate (MOVE Index), which measures bond market volatility, has dropped from its peak of 180 in 2023 to around 111. This decrease signifies the market’s belief that rates will not surge again.

This confidence in stable rates has a direct impact on stock prices. Higher bond yields present competition for the stock market. However, if investors are confident that yields will not spike further, they are more inclined to buy stocks at their current valuations. As Jay Woods, the chief global strategist at Freedom Capital Markets, explains, “the VIX is back to its slow and boring ways.” The VIX index measures stock market volatility, and its return to a more normalized range suggests a calmer and more predictable stock market.

Markets are now experiencing a smoother ride, providing a sense of calmness and making it a more attractive investment opportunity.

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