Markets across the globe continue to plummet early this Tuesday morning. Now that the super bowl is over, many bets are being placed on which direction our stock markets are headed. The most pertinent questions at hand are: what are global stock markets expected to do after the major losses yesterday? Are there resources that can help us understand short-term expectations?
The Dow Industrial Average ended down yesterday 4.6%, while the S&P 500 fell 4%.
Why is this happening? The short answer is that the market is reacting to fear of interest rates rising too quickly to combat potential inflation.
Right now, the Federal Reserve is expected to raise interest rates once again, which is influencing market participants to re-evaluate their market exposure. While many are worried about a big sell-off in the near term, it is important to note that we have been through times of high volatility before. Corrections of 7 – 10% are certainly within the norm. However, you may be asking yourself today, “How do we measure the current state of fear in our market right now?”
The CBOE Volatility Index (VIX) aka “investor fear gauge” is a great measure of market volatility expectations in the short-term. The VIX often shows an inverse correlation to market indices. As uncertainty/fear gains momentum, so gains the probability of higher volatility during the next 30 days.
The graph above is an example of the inverse relationship between the Dow and the VIX. As you can see, when the VIX rises (indicates more uncertainty/fear), the Dow declines and vice versa.