The Worst Of The Stock Market Crash May Be Yet To Come, According To Wall Street's 'Fear Gauge' Signal

Topline

As investors grapple with the worst-performing market in years, some experts have zeroed in on Wall Street’s so-called fear gauge as an indication that stocks have more room to fall—even as major indexes flirt with bear market territory.

“If investors truly believed the bottom was near, we would likely see an even higher VIX,” says one … [+] analyst who warns of a “deeper selloff”.

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Key Facts

The CBOE Volatility Index, a measure of expected volatility known as the “fear gauge,” leaped to nearly 35 points on Monday as stocks added to staggering losses this month—approaching a 52-week high of nearly 39 points in early March, when Russia’s invasion of Ukraine exacerbated market uncertainty and pushed the S&P 500 down 5% in a matter of days.Still trading below its March highs even after “ugly” stock-market declines last

week, the VIX appears “muted” relative to recent market stress—a sign “investors believe an even deeper selloff may occur over the coming months,” Robert Schein, the chief investment officer of Blanke Schein Wealth Management, said in emailed comments.

“If investors truly believed the bottom was near, we would likely see an even higher VIX,” he added, pointing to the Federal Reserve’s looming interest rate hikes as a potential catalyst for future sell-offs.

In a Monday note, DataTrek Research cofounder Nicholas Colas said he’d view the VIX closing at 36 or higher “as evidence of a larger washout in U.S. equities,” which “really should have happened” on Friday, the day after the Dow Jones Industrial Average notched its worst day since 2020, plunging more than 1,000 points.

“But it did not,” Colas said of the relatively restrained VIX, “and so we continue to wait for an investable bottom.”

Not everyone, however, is bearish on the VIX: LPL Financial Chief Market Strategist Ryan Detrick said the VIX’s recent spike could be “potentially bullish from a contrarian point of view,” given that various other sentiment signals are flashing signs of extreme fear—suggesting the tide could turn as money managers gear up to buy stocks at low prices.

Crucial Quote

“While many investors are focused on finding the market’s bottom, we encourage investors to be prepared for a sideways trade for quite some time,” says Schein. “Just because a market bottoms, doesn’t mean it’s headed right back to record highs.”

Key Background

Fresh off the stock market’s worst quarter since the Covid downturn two years ago, many experts still aren’t convinced a recession is in the cards this year. However, some are cautioning the risks could keep rising through next year as the Fed eases stimulus measures—signaling more bad news for stocks. In a client note last week, Morgan Stanley analyst Michael Wilson warned that mounting evidence showing economic growth is slowing more quickly than feared sparked an “especially vicious” end-of-month stock selloff and likely isn’t over. Wilson predicts the S&P, which has already plunged 17% this year, could plummet another 13% before it bottoms out.

What To Watch For

Stocks will likely find a bottom when the Fed signals a pause in its tightening campaign, or inflation shows signs of moderation, Schein says. The consumer price index report is slated for release Wednesday morning. Economists estimate prices rose at about 8.1% last month, down from 8.5% in March, but still far higher than the Fed’s target of 2%. Meanwhile, the Fed’s not slated to meet again until June 14.

Surprising Fact

Over the past 11 recessions, the S&P declined between 14% and 57% peak to trough, at an average of 27.5%, according to Bank of America.

The Worst Of The Stock Market Crash May Be Yet To Come, According To Wall Street’s ‘Fear Gauge’ Signal