Published April 18, 2025
Below, we provide an excerpt of Blake Millard’s work discussing the impact of spikes in volatility. The market recently had a major spike with volatility remaining very elevated. What happens next historically? Here’s some data.
“As volatility contracts, what to make of the recent bounce
With the S&P 500 index down -12.2% since the February 19 high and the volatility index spiking to 60 over the last week, a lot of repricing from the complacent market setup at the start of the year (Fed put, Trump put, animal spirits, deregulation, tax cut extensions, etc.) has led to a dramatically different macro outlook going forward.
The volatility index, or “VIX,” which is often described as the market’s “fear gauge,” has surged to levels only witnessed during the Global Financial Crisis and Covid-19 pandemic, this side of the millennium. For most investors, this recent bout of instability and uncertainty is about as bad as they’ve ever experienced.
Weekly realized S&P 500 volatility has risen to its highest level since covid-19 and currently ranks in the 99th percentile vs. the past 50 years.
A 30 VIX implies a one-day move in the S&P 500 of roughly +/-2%. Last week, when the VIX skyrocketed to 60, implied a one-day move of roughly +/-4%.
These levels of daily price movements – not to mention the day-to-day tariff and trade war announcements – are not for the faint of heart.
The upshot to this madness?
Historically speaking, following major market tantrums and the corresponding sharp spikes in the VIX, equities have tended to reward patient investors – especially in the context of historic breadth capitulation and porous sentiment that currently plagues the market.
When looking at 3-month forward returns after the VIX has jumped higher by more than 50%, the S&P 500 has subsequently traded higher roughly 70% of the time over the next three months, absent a recession. There is a stark difference between the market behavior within or without a recession as we see toward the bottom of this table. That recession or not discussion dominates current market analysis.
And yet, there remains some consternation that this recent bounce is your classic bear market rally.
As you can see in the table above, the forward-return data shows stronger 3-month median and average returns inside recessions than outside recessions. In other words, this market remains guilty until proven innocent and there is still work to be done and levels to reclaim to validate the bullish thesis.
One final point on this extremely volatile trading environment.
Jason Goepfert of SentimenTrader shared historical data of what happens to the market after the VIX drops from above the 50 level to below 30, as it has over the last week or so.
While the sample size is very small and thus statistically not significant, each previous signal has shown the market to be stronger, especially over longer time frames. As Jason writes, this indicator is a “bear killer.”
Market Update
After two weeks of extremely volatile markets, investors looked this week to a mid-week Federal Reserve meeting for insight on the central bank’s interest rate outlook. Interest rates have fallen since the beginning of the year, but have recently become volatile as markets have expressed heightened uncertainty. Monday brought a +0.8% gain when clarification on tariffs produced certain exemptions for some tech consumer goods. A 0.2% dip Tuesday with banks continuing to post solid earnings results though accompanied by cautious outlooks. Export restrictions on semiconductors imposed by the Trump Administration combined with a weak report from Dutch semi equipment make ASML to send semi stocks sharply lower Wednesday. The stock losses accelerated when Fed Chair Powell reaffirmed the central bank’s concerns about inflation reigniting once tariffs hit. The combination of negative news sent the Nasdaq down -3% to reverse the bounce of Monday and Tuesday. Thursday saw markets hold mostly flat though the Dow Industrials slipped on a surprisingly sour report from health insurer United Healthcare. The company’s stock fell -22% in their first earnings miss in a decade.
Volatility eased this week though stocks gave back some of the prior week’s bounce. The S&P 500 fell -1.41% while the Nasdaq 100 (QQQ) tumbled -2.27%. Small cap stocks found strength in energy and finance shares to post a +1.15% lift.
Warm wishes and until next week.