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ORLANDO, Florida – Financial market volatility has bubbled up to its highest level this year thanks to the chaotic implementation of US President Donald Trump’s protectionist trade agenda. While volatility hasn’t boiled over yet, investors would do well to guard against complacency, because tariff fatigue may push it over the edge.
Implied volatility in the S&P 500 as measured by the VIX index – Wall Street’s so-called fear index – is now the highest since the Fed cut interest rates in December, a decision markets interpreted as a mistake at the time. The VIX has almost doubled in the last month, and on Monday the three-month VIX spiked to its highest since August.
The ‘MOVE’ index of implied volatility in the US Treasury market is also the highest in four months, which is especially notable as it is accompanying a rally in Treasuries prices rather than a bond market selloff and rise in yields.
Volatility is still well below levels associated with past market crises, or even recent episodes like the 2023 US regional banking panic or Japan’s yen carry trade shock last August. Its recent rise certainly hasn’t matched the ongoing surge in policy uncertainty that, by some measures, has never been higher.
Analysts at JP Morgan put this suppression of volatility down to retail investors’ willingness to ‘buy the dip’, which has provided a “persistent backstop” to equities, the rise of ‘passive’ equity investing over ‘active’ management, and the strength of investor and corporate balance sheets.
They note that since the S&P 500’s peak on Feb. 19, US equity ETFs have only recorded one day of net outflows. Cumulative inflows over the period have exceeded USD 30 billion, which has helped limit the broader market decline.
But based on White House statements over the past few days and intensifying market ructions, it’s possible we’re soon going to see a true spike in volatility as investors start to question whether ‘buying the dip’ is such a good idea.
‘DETOX’ PERIOD
Warnings about further market turbulence are now coming from on high. US Treasury Secretary Scott Bessent said on Friday that the economy is entering a “detox” period, and Trump declined to rule out a recession in an interview with Fox News broadcast on Sunday.
Trump, who tweeted more than 150 times about the rising stock market during his first term, also said on Friday that he’s “not even looking at the market” and that there will likely be some “disruption” as his tariffs are implemented.
He’s not wrong there.
The so-called “Trump bump” is long gone. The S&P 500 is lower than it was before his November 5 election win and is now down nearly 10% from last month’s high and close to official correction territory. The Nasdaq is already in a correction, and has lost 14% in just three weeks after slumping another 4% on Monday.
And even if recession risks flagged by some GDP models prove to be unfounded, the economic outlook is still darkening rapidly. Economists at Morgan Stanley just cut their 2025 GDP growth forecast to 1.5% from 1.9%, and economists at Goldman Sachs trimmed theirs to 1.4% from 2.4%.
Economic growth at these below-trend rates is unlikely to sustain current equity valuations, hence the repricing currently underway, and the growing tariff fatigue should only exacerbate this downturn.
Every tariff announcement from Trump moving forward – whether it’s an unveiling, pause or exemption – is likely to be met with a selloff on Wall Street. If he doesn’t pull back, stocks fall on the feared economic impact; if he does pull back, stocks fall on the resulting chaos, confusion, and uncertainty.
“Trump’s leverage credibility with tariffs is quickly eroding,” says Alfonso Peccatiello, chief investment officer at Palinuro Capital.
The volatility dam has, by and large, held. But pressures are building. Investors may need to seek cover.
(The opinions expressed here are those of the author, a columnist for Reuters.)
(By Jamie McGeever; Editing by Bill Berkrot)
