Record Drop in Cboe Volatility Index Amid Easing Trade Tensions

TL/DR –

The Cboe Volatility Index (VIX) fell from above 40 to below 20 between April 10 and May 12, the quickest decline in its history, driven by easing trade tensions between the US and China. The Trump administration’s pauses in implementing tariffs led portfolio managers to believe the tariffs would ultimately settle well below the rates proposed in early April, providing a boost to investor confidence. First-quarter profits from large corporations also reassured investors who were worried tariffs would hinder growth.

Key Insights

• The Cboe Volatility Index (VIX) fell from over 40 to under 20 at a record-breaking speed between April 10 and May 12.
• Confidence in lower tariffs due to the Trump Administration’s various pauses has given investors optimism.
• Strong Q1 earnings have assuaged concerns that tariffs will hinder growth.

2021 has seen historic volatility on Wall Street, even including volatility measures themselves.

The Cboe Volatility Index (VIX), also known as “the fear index,” spiked above 40 for the first time since 2020 in early April due to President Trump’s “Liberation Day” tariffs. However, the VIX began a swift descent from April 9 when Trump paused most of these tariffs for 90 days.

From April 10 to May 12, the VIX plunged from 40.72 to under 20, marking the fastest return to “normal” territory in its history dating back to 1990, according to Bespoke Investment Management.

Eased trade tensions primarily drove the VIX’s recent decline. After U.S. and Chinese officials agreed to cut their respective tariff rates for 90 days while discussing a more permanent end to their trade war, the VIX fell under 20 and the S&P 500 reversed its “Liberation Day” losses.

The VIX finished Friday at 17.24, a decline of over 20% from the previous week.

Trump’s tariff pauses have boosted confidence among portfolio managers, according to David Kostin, chief U.S. equities strategist at Goldman Sachs Research. However, tariffs have not returned to their previous levels and are on a new trajectory entirely. The U.S. tariff rate is currently 17.83%, slightly below the 22.44% rate set on “Liberation Day.”

A solid Q1 earnings season has eased some fears about the potential impact of tariffs on economic growth. The S&P 500 was set to report over 13% earnings growth, exceeding the 7% expected at March-end.

Despite these developments, much uncertainty remains. “Liberation Day” tariffs are due to resume in early July, just as companies start reporting earnings for the quarter when most tariffs took effect. This could lead to a return to April’s volatility if the White House fails to reach agreements with the dozens of countries threatened with tariffs.

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