Stock Market's "Fear Gauge" Experiences Accelerated Normalization at Unprecedented Pace
In the chaotic world of Wall Street, even volatility measures have been on a wild ride. In 2025, the Cboe Volatility Index (VIX), also known as "the fear index," reached an intimidating height above 40 for the first time since 2020, causing a stock market freefall. But then, something unexpected happened.
Starting on April 9, the VIX began a swift descent when President Trump paused most of his tariffs for 90 days. By May 12, the VIX had plummeted from 40.72 to a comforting level below 20, a move that had never been recorded at such a fast pace in its history since 1990. This unprecedented drop in the VIX was dubbed the speediest descent into tranquility by Bespoke Investment Management's recent analysis.
Easing trade tensions was the primary reason behind the VIX's meteoric fall in the recent weeks. U.S. and Chinese officials came to an agreement last weekend to slash their respective tariff rates for 90 days while they discuss a lasting end to their brutal trade war. When this agreement was announced on Monday, the VIX tumbled below 20, and the S&P 500 swiftly erased its losses from President Trump's "Liberation Day" tariffs.
The VIX closed the week at 17.24, having plunged more than 20% from the previous week. David Kostin, chief U.S. equities strategist at Goldman Sachs Research, said the numerous tariff pauses gave portfolio managers a sense of reassurance that there was an exit strategy.
However, it's worth noting that tariffs haven't exactly returned to their initial levels; they're treading on a new path. Commerce Secretary Howard Lutnick ruled out reducing tariffs below 10%. At present, the effective U.S. tariff rate stands at 17.83%, up from a mere 2.42% at the start of the year and just below the 22.44% rate established on "Liberation Day."
A remarkably successful first-quarter earnings season helped to alleviate some concerns about the drag tariffs might inflict on economic growth. As we head into this week, the S&P 500 was projected to record earnings growth of over 13%, a substantial leap from the 7% predicted at the end of March.
Despite the positive momentum, a significant degree of uncertainty lingers. "Liberation Day" tariffs are set to reactivate in early July, around the time companies begin reporting earnings for the quarter in which the majority of tariffs took effect. This phase could see a resurgence of April's volatility if the White House fails to broker agreements with the numerous countries it has threatened with tariffs.
So, while the VIX's dramatic descent might mark a positive shift, it's essential to stay vigilant as the future of trade tensions remains uncertain.
Investors in the business world may find opportunities in the finance sector, given the swifter than usual fall of the Cboe Volatility Index (VIX) due to a tariff pause announcement. This descent, considered the speediest in the index's history, could potentially signal a calmer investment climate, but it's important to remain vigilant as the future of trade tensions remains uncertain.
