After experiencing an unusually calm summer, Wall Street's fear gauge has surged again as investor concerns intensify over potential further escalation in US-China trade tensions. The Chicago Board Options Exchange Volatility Index (VIX), commonly known as the "fear gauge," spiked to 22.94 points during Tuesday's trading session, marking its highest level since May 23 when it reached 25.53 points. Although gains moderated by the close, the VIX still finished above the critical 20-point threshold, an important barometer for market sentiment.
Since the VIX's introduction in the early 1990s, its long-term average has hovered just below 20 points, making this level a widely recognized dividing line between market calm and anxiety. The VIX reflects implied volatility of S&P 500-linked options over the next month and is typically viewed as an indicator of market fear or risk expectations.
This summer, US equities performed steadily, with the S&P 500's three-month realized volatility dropping to its lowest level since January 2020 last week, reflecting lackluster trading activity and investor complacency. However, since early September, implied volatility and realized volatility have begun to diverge, suggesting some investors are positioning defensive strategies through options.
Some investors have increased put option positions to hedge potential risks, while others prefer call options over direct stock holdings, betting on further market gains. Signs of market unease began emerging in late September. From September 29 to October 3, the S&P 500 and VIX rose simultaneously for five consecutive trading days - the first occurrence since 1996, signaling that the market's calm period may be ending.
Analysts note that market sentiment resembles a warehouse stacked with dry kindling, requiring only a spark to ignite volatility, with Friday's selloff potentially serving as that catalyst.
Recently, US-China trade friction has reemerged as a flashpoint. Last Friday, President Trump threatened to impose 100% tariffs on all Chinese imports. Despite trade news causing short-term market volatility, some institutions believe this "escalation-cooling" cycle has gradually numbed investors.
In comparison, signs of credit market instability may warrant greater attention. JPMorgan CEO Jamie Dimon warned Tuesday that the bank faces losses on loans to subprime auto lender Tricolor, suggesting credit risks could expand. Meanwhile, institutional investors including BlackRock are seeking redemptions from a Jefferies fund that suffered significant losses due to auto parts supplier First Brands' bankruptcy.