The US stock market has found itself ensnared in a state of intense fear for the first time in half a year, as indicated by the widely-cited “Fear and Greed” index. This index, which takes into account several factors including the Cboe Volatility Index (VIX), commonly known as Wall Street’s fear gauge, displayed a reading of “extreme fear” on Wednesday, marking the first instance since March 15 when the market was still reeling from the Silicon Valley Bank collapse.
Fear Is The Emotion Driving The US Stock Market: Wall Street Fear Gauge
On Wednesday, the VIX surged to 18.70, its highest level since May 25. Besides the VIX, the index incorporates various data points such as the number of New York Stock Exchange-listed stocks reaching 52-week highs vs. those at 52-week lows.
Furthermore, the index factors in options-market activity through the five-day put-to-call ratio, which currently stands at 1.07, also the highest since March. This signifies that the demand for put options, serving as insurance against further stock market declines, has exceeded the demand for call options, which represent bets on the rise of stock indices or individual stocks.
Notably, the only component of the index not indicating “fear” or “extreme fear” is the reading on junk-bond spreads compared to investment-grade spreads, which have remained relatively stable despite the rising Treasury yields.
US stock markets experienced fluctuations throughout Wednesday, with the S&P 500 struggling to avoid its fifth down day in the last eight. As of recent trading on Wednesday, the S&P 500 was up by 0.2 percent at 4,820, the Nasdaq Composite was up by 0.5 percent, and the Dow Jones Industrial Average was slightly in the red with a 0.1 percent drop, totaling 33,599 points.
These swings in US stocks have been triggered by the Federal Reserve’s recent projection that it plans to maintain its benchmark policy interest rate target above 5 percent through 2024, a timeline that surprised investors.
Analysts have attributed much of the stock market’s struggles to rising Treasury yields and a strengthening dollar.
US Stocks Slide Amid Inflation Concerns and Looming Government Shutdown
US stocks shifted from earlier gains to losses due to concerns about inflation and the potential for a government shutdown.
The previous day, Wall Street’s primary indices closed significantly lower, with the Dow Jones Industrial Average, consisting of 30 stocks, experiencing its worst day since March, plummeting by nearly 400 points (1.1 percent). The broad-based S&P 500 fell by 1.5 percent, and the technology-heavy Nasdaq Composite declined by 1.6 percent.
The decline in consumer confidence to a four-month low in September, attributed to elevated prices and concerns of a recession, weighed on market sentiment. This was exacerbated by the Federal Reserve’s recent signal of another interest rate hike in the near future.
Meanwhile, Treasury yields slightly eased back, with the 10-year Treasury, which had reached levels not seen since 2007, falling to 4.5 percent. In August, durable goods orders rose by 0.2 percent, defying expectations of a 0.5 percent decline after a 5.2 percent fall in the previous month.
Investors also remained cautious about developments in Washington, where Congress had a limited time frame to reach an agreement on temporary funding to avert a government shutdown.
Experts had previously warned that a federal government shutdown could harm the country’s credit rating, potentially leading to a downgrade of the US’ remaining triple ‘A’ rating.
The Implications Of Fear And Greed Index On US Stock Market
JPMorgan Chase CEO Jamie Dimon’s remarks about the possibility of further interest rate hikes to combat inflation contributed to bearish sentiment. Bank stocks, including the SPDR S&P Regional Banking ETF and Wells Fargo, faced declines of over 1 percent, while Morgan Stanley saw a 1 percent drop.
“Investors remain on the edge, concerned about the implications of rising bond yields on the economy, the stock market, and the Federal Reserve’s actions, as well as the value of the dollar”
The ongoing negotiations in Washington to avert a government shutdown on October 1st added to the uncertainty.
Despite October’s historical reputation as a “jinx month” due to past crashes in 1929 and 1987, it is also known as a “bear killer” in some circles, as stated in the “Stock Trader’s Almanac.” This suggests that upcoming seasonal market fluctuations may offer opportunities for investors.
