Several major gauges of fear in the market reflect heightened investor alarm. The Cboe Volatility Index, a measure of expected market volatility that is known as Wall Street’s “fear gauge,” topped 19 on Monday and closed at its highest level since October. It approached the key level of 20 in late fall of 2023 and at other times during the pandemic when investors worried about a market correction. @VX.1 1Y mountain The VIX over the past year At the same time, CNN’s Fear and Greed Index tipped into “fear” territory this week. The market sentiment tracker sat in “neutral” territory a week ago, but was comfortably in the “miserly” range both a month and a year ago. The index, which compiles seven different measures including put-and-call options and junk bond demand, has five labels ranging from “extreme greed” to “extreme fear.” When it gives below an average score of 50 as it has done in recent days, it can be taken as a sign of investors growing nervous. And the Goldman Sachs trading desk’s so-called Panic Index climbed to levels not seen since early 2023. Before that, it last touched this point during the 2022 market sell-off. Taken together, these data points underscore growing frustration among market participants . This comes amid a breather after the market rally, as concerns mount over the potential for interest rates to stay higher for longer and for an escalation of the conflict gripping the Middle East. The market was thrown “this fear flies in the ointment,” said Alex McGrath, chief investment officer at NorthEnd Private Wealth, citing the situation in the Middle East in addition to strained market valuations and the path of interest rates. “You have so much up in the air right now.” Monetary policy has been top of mind for more than a year, as investors have wondered when, or if, the Federal Reserve will begin lowering interest rates after a historic tightening campaign. Fed funds futures traders are pricing in the first rate cut coming in September, according to the CME FedWatch tool. That’s much later than market participants had anticipated in the year. Those hoping for a rate cut sooner rather than later were dealt a hard blow when closely watched economic data was released last week. On an annual basis, price indices linked to both consumers and wholesalers showed that inflation remained above the Fed’s preferred 2% clip, raising concerns that the cost of borrowing could remain elevated longer than previously expected. That contributed to a recent market drop, as the major indexes pulled back in April from record highs set earlier this year. Month to date, the S&P 500 is down more than 3%, while the Nasdaq Composite is off nearly 3%. The Dow is poised to slide nearly 5% over the period. .DJI .SPX,.IXIC YTD mountain The three major indexes in 2024 This latest decline has put the Dow just shy of its 2024 flat line, a stunning reversal after trading near the key 40,000 level just weeks before. Treasury yields also took a leg up, with the rate on the 10-year note topping 4.6%. Rising oil prices also weighed on the stock market, as commodity traders bought into expectations of escalating conflict in the Middle East. Iran launched hundreds of drones and missiles at Israel on Saturday, although the attack was largely thwarted by the latter’s defense system. Now, traders are watching for Israel’s response. The current market downturn should not yet be considered anything other than a typical — and healthy — correction, said Jason Heller, executive vice president of Coastal Wealth. But he said the key threat to this outlook is if the conflict in the Middle East continues to spiral. “Very rarely do you get an escalator up in the market — it tends to be an elevator ride,” Heller said. But, “I always write in pencil when I give you predictions, because things can change.” “This is just the natural ebb and flow, I think, of market prices,” he added. “But, the caveat is, if things really go sideways in the Middle East, that could change the calculus.”
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