Despite furious bouts of selling in the equity markets, the Cboe Volatility Index (VIX), which is Wall Street’s so-called fear gauge, has remained stubbornly low this year. To help investors understand what this may mean for their portfolios, Bloomberg recently spoke with Axonic Capital Director of Research Peter Cecchini for insight.
According to Cecchini, this is likely a sign that the markets have yet to hit rock bottom. While historically a surge in the VIX has preceded bear market bottoms, the same may not happen this time around until worries about a recession and corporate earnings hit a fever pitch and ignite panic selling.
“Why don’t we see a higher VIX? We rarely do until we’re in the latter stages of a selloff,” Cecchini explains. “Part of the issue is investors are already aware of the known risks markets face, like high inflation and an aggressive Fed. It’s what’s unknown that will spur a huge wave of volatility. The next shoe to drop is likely problems related to corporate earnings estimates being too high and margin compression. Thereafter, the catalyst will likely be recession that will be accompanied by high defaults and delinquencies from American consumers as funds dry up.”
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