Volatility in the stock market is represented by the CBOE Volatility Index (VIX), also known as the fear gauge. This tends to outperform when markets are falling or when fear over the future is high. Notably, VIX has risen 9.6% over the past one-month period, reflecting that worries over the stock market have started to build up.

Will the fear level continue to rise and push up the index?

What is Pushing Fear Levels?

After an impressive comeback, the S&P 500 and the Dow Jones dropped for the third consecutive week, representing the longest streak of weekly declines since January’s market meltdown. This slump has wiped off most of the gains from these indices, pushing the year-to-date gains down to 0.1% for the S&P 500 and 0.6% for the Dow Jones. The decline resumed after a spate of downbeat data across the globe, in particular China and UK, that brought global growth worries back on the table.   

Additionally, the growth momentum in the U.S. has slowed down and investors’ faith in central banks’ ability to boost growth across the globe has faded. Further, signs of sluggish growth in Europe and Asia, a pullback in industrial metals, the oil price drama, and Fed’s uncertain policy continue to weigh on stocks. This is especially true as Friday’s solid retail sales data for April reignited the case for two interest rates hikes this year while the weaker-than-expected April payrolls data early this month cast doubts over the health of the economy and pushed back the chances of a rate hike.

The latest round of selling last week followed a slew of disappointing earnings reports from retailers that sparked off concerns over consumer spending. All these factors flared up volatility, pushing the volatility index higher.
 
As per the ft.com, investors pulled out about $7.4 billion from global equities last week, sending the total outflow of five weeks to a five-year high of $44 billion. This reflects weakening faith in the global equity markets. Moreover, the International Monetary Fund (IMF) once again cut its global growth forecast to 3.2% from the earlier projection of 3.4%, citing that the ill effects of a persistent slowdown in China and lower oil prices have spilled over into emerging markets such as Brazil.

The agency also highlighted economic weakness in developed countries like Japan, Europe and the U.S. This could lead to poor stock performance across the globe, providing further support to the volatility index.

Against a woe-begotten backdrop, investors could look into volatility products that have proven themselves as short-time winners in turbulent times. They can use these products for hedging purposes to ensure safety when the stock market starts to plunge.

Volatility ETFs in Focus