Markets brace for volatility as VIX rises to highest level since April

As the end of July nears, analysts look ahead to August, a historically volatile month made more interesting this year by the US presidential election.

The S&P 500 and Nasdaq Composite indexes in August 2023 lost 1.6% and 2.1%, respectively. The year prior, the S&P 500 lost just under 1% and the Nasdaq Composite slid 4.6% during August.

The CBOE Volatility Index (VIX) has, for the past eight presidential election years, peaked most often during the first half of the year. Given the especially uncertain nature of this year’s presidential race, volatility in 2024 could peak later than is typical, analysts say.

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The VIX at time of publication was 17.3, up more than 20% over the past five days and at its highest level since the spring. So far in 2024, the VIX peaked in April at 19.2.

Given the looming Federal Reserve policy-setting meeting, the Democratic delegate vote and earnings season reports, a rising VIX is to be expected. However, it still has yet to hit 20, the level historically seen as a key indicator of swelling volatility.

Markets seem confident that central bankers will start their rate-cutting cycle in the fall, and delegates have all but confirmed Vice President Kamala Harris as President Joe Biden’s replacement, so investors may not be too worried about the coming months.

Investors will also be looking ahead to October, which will also be when presidential election speculation will peak as campaigns make their last attempts to woo voters and early voting kicks off.

The S&P 500 and Nasdaq Composites lost 2.1% and 2.8%, respectively, in October 2023.

Still, as DataTrek Research co-founder Jessica Rabe pointed out, stocks more often than not peak during the final quarter of the year. In the past four-plus decades, the S&P 500 has posted its high during the fourth quarter.

Stocks have already posted double-digit returns during the first six months of the year, with the S&P 500 and Nasdaq Composite indexes gaining around 15% and 18%, respectively. A strong first and second quarter performance for equities historically leads to a slowdown in the final half of the year, Rabe said.

“The S&P’s rally tends to slow in the back half after rising by double digits in the first half, so the bulk of the index’s gains are likely already in for this year,” Rabe explained. “That said, the S&P is only up 1.7% in 2H thus far versus the average of 6.7%, so history says there’s still gains to be had.”

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