MW Wall Street's fear gauge just dropped with striking speed. What historically comes next?

By Christine Idzelis

The U.S. stock market just saw the 'quickest evaporation of volatility in the entire history of the VIX,' according to Bespoke

Extreme volatility in the U.S. stock market has evaporated, with a popular gauge of investor anxiety now sending a bullish signal after the initial tumult surrounding President Donald Trump's sweeping tariffs settled down.

The Cboe Volatility Index VIX slipped Tuesday to 18.22 , according to FactSet data. That's after closing Monday at 18.4, below its long-term average of 19.5, to slide "solidly back in bull-market territory," said Nicholas Colas, co-founder of DataTrek Research, in a note emailed Tuesday. That marked "a good step toward a more normal investment environment."

That's after the volatility gauge jumped to a rare "crisis" level last month following Trump's "liberation day" tariff announcement on April 2, an extreme surge that indicated that an immediate policy response was needed, according to DataTrek. Soon after that, Trump hit pause on so-called reciprocal tariffs for countries, except for China, and volatility subsided.

The volatility index, known by its ticker VIX, fell even further this week after the White House and China agreed to significantly lower steep tariffs for 90 days. That outcome of the U.S.-China trade talks over the weekend prompted Wall Street analysts to dial back the probability of a recession, with investors seeming increasingly optimistic that the White House will negotiate more favorable trade deals with levies that are ultimately lower than those announced April 2.

"Whereas markets were reacting with excessive fear, now they're probably reacting with excessive optimism," said Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute, in a phone interview Tuesday. "These are still large tariffs."

The VIX went from over 40 to under 20 in record time, with such a speedy decline historically boding well for future S&P 500 returns, according to Bespoke Investment Group.

"As equities crashed in early April with historic declines in just a few trading days, the VIX understandably surged above 60 to levels rarely seen before," Bespoke wrote in a note emailed Tuesday. "Its last close above the still-high 40 level was on April 10."

"The surge in volatility has been short-lived," said Bespoke. "With the VIX closing below 20 yesterday, the 21-trading-day span between closing above 40 and falling below 20 was the quickest evaporation of volatility in the entire history of the VIX (since 1990)."

Bespoke tracked the VIX's fastest drops from more than 40 to under 20, finding that the S&P 500's performance then tended to be positive after one week, one month, three months, six months and one year. The Bespoke table below also captured the S&P 500's gains as it was falling during such a decline for the VIX.

After the White House over the weekend lowered levies on Chinese goods to 30%, from 145%, the stock market rallied. The temporary agreement was better, and came faster, than Wall Street had expected. "All of a sudden, holy cow," that's a lot better by comparison, said Christopher.

The S&P 500 SPX rose Tuesday to end the trading session up 0.1% so far in 2025. That's the S&P 500's first positive close on a year-to-date basis since Feb. 28, according to Dow Jones Market Data.

Wells Fargo Investment Institute expects that the S&P 500 will end this year at 6,000, according to Christopher. He expects that the U.S. can "skirt" a recession in 2025, but he said that he anticipates tariffs will lead to higher inflation later this year and that economic growth will slow.

Even with the recent suspensions of tariffs, Christopher pegged their effective rate at 13%, saying that's five times higher than at the start of the year. Still, the thawing in trade tensions between the U.S. and China is a welcome development.

After the recent de-escalation, analysts at Goldman Sachs said in an economics research note dated May 12 that they were raising their 2025 growth forecast by half of a percentage point, to 1%, and lowered their "12-month recession odds to 35%."

The U.S. stock market closed mostly higher on Tuesday, with the S&P 500 rising 0.7%, the technology-heavy Nasdaq Composite COMP jumping 1.6% and the Dow Jones Industrial Average DJIA falling 0.6%, according to FactSet data.

-Christine Idzelis

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May 13, 2025 16:52 ET (20:52 GMT)

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