As for what this means for investors, there’s one key takeaway: the ingredients are in place for more financial market volatility.
In the space of barely a week, the VIX Index, a measure of market volatility, spiked from 13, suggesting extreme complacency, to over 50, evidencing total panic. The low-volatility climate of the past few years is incompatible with a world marked by slow growth, unstable inflation expectations and a likely Federal Reserve rate hike before year’s end.
Market Realist – Volatility is likely to stay high as global growth slows.
The graph above shows the volatility index, or VIX (VXX), which is known as a fear gauge for stocks. After remaining calm for most of the last few years, American stocks saw a sudden spike in volatility last month.
The sell-off, which was triggered by the devaluation of the Chinese yuan, was due to a variety of reasons including more evidences of a slowdown in China (FXI), lofty global equity valuations, and the probability of a rate hike in the US later this year, among others.
With growth projections of most major economies falling, it is likely that volatility will stay elevated. Within major emerging markets, Brazil (EWZ) and Russia (RSX) are both in deep recessions due to low commodity prices. India’s (EPI) lack of ability to push through key reforms has led to a fall in growth projection.
Read Is a Recession Coming? to find out more about the economic situation.