Fasten your seatbelts

The VIX index, which measures the coming volatility of the stock market implied by call and put options on the S&P 500 for the coming month, surged to 65 yesterday. This marks the largest increase since the index was created in the late 1980s, comparable to spikes seen during the COVID-19 pandemic and the Lehman Brothers collapse. Despite this, we haven't identified any event of a similar magnitude to justify such a dramatic move, barring unforeseen major negative developments in the Middle East in the coming days. While some investors might hope for an emergency 50 basis point interest rate cut by the Federal Reserve, we consider this unlikely given that the S&P 500 remains up 8.7% year-to-date and the Nasdaq is up 7.9%. Additionally, the yen carry trade operates on its own dynamics and should be viewed independently. Notably, the Topix index increased by 9.5% this morning, and EURO Stoxx 50 futures are up 1% as I write this. Ultimately, while volatility is significant, financial markets will eventually reflect the underlying economic and corporate fundamentals, which have not changed overnight. Our portfolios are strategically positioned with this in mind.