World Economy

Fear-Gauge Flashes on Wall Street

Fear-Gauge Flashes on Wall StreetFear-Gauge Flashes on Wall Street

Europe’s economy sputters, oil prices plunge and stocks start swinging wildly. Wall Street’s long dormant “fear index” now predicts more turbulence ahead.

The Chicago Board Options Exchange’s volatility index, known as the VIX, doubled over the past month: from 12 to 26. Although that’s nowhere near the 80 reached in the financial crisis, the recent spike means traders are bracing for more big jumps and steep drops, AP reported.

Slowing growth in Europe and the developing world have stirred up lingering doubts among investors just as the Federal Reserve plans to wind down a bond-buying program that many considered a driving force behind the stock market’s five-year run.

Traders have knocked the Standard & Poor’s 500 index down 4% this month and retreated into their hiding spots, driving up demand for some of the world’s safest investments, US and German government bonds.

All of a sudden, Wall Street’s fear gauge looks relevant again.

“We’ve gone from the S&P 500 hitting all-time highs to losing all its gains for the year in just a month and a half,” said J.J. Kinahan, TD Ameritrade’s chief strategist, referring to the benchmark index for US stocks. “There has been a sea of change in how people are viewing the market.”

The past week was especially turbulent. As markets plunged Wednesday, the VIX reached levels last seen in June 2012, when worries about the European debt crisis gripped global markets and the US economy’s fitful growth kept investors on edge. By Friday, as markets rallied, it slid back to 20 – its historical average.

The US stock market had been relatively calm for the bulk of the year. In July, the VIX dropped to 10, its lowest level since February 2007. Markets were so calm this summer that some days it appeared Wall Street had collectively nodded off on a beach chair. Observers called it boring.

Investors kept an eye on conflicts in the Middle East, rising tensions between the US and Russia and other worrisome news. But as long as interest rates stayed low and companies kept hiring more workers, none of it sapped their confidence in the stock market.

Things started to change in late September as reports began piling up that Germany’s economy, the largest in Europe, was close to a recession. Economists warned of a global slowdown. Major markets in Europe tanked and the US stock market began its slide.