Drop in Wall Street’s fear gauge is least-appreciated market positive
Wall Street’s “fear gauge,” the Cboe Volatility Index (VIX), is at its lowest levels since the Covid-19 pandemic began in early 2020. While investors may be underappreciating its impact, Fundstrat’s head of research, Tom Lee, believes it’s one of the key drivers of this year’s gains. According to Lee, the VIX impact is “the least appreciated” upside catalyst for stocks. In a note on Friday, Lee pointed out that in the last 30 years, when the VIX is down year-over-year post-negative equity year, the median gain is 22%. “In other words, [the] VIX trajectory was the single biggest determinant at the start of 2023,” he said. The S&P 500 is up nearly 12% through Thursday’s close and crossed above 4,300 on Friday, a level not seen since August 2022.
Lee, one of the biggest bulls on Wall Street, forecasted that the S&P 500 will rise more than 20% this year. However, he emphasized that two events next week could be “the most critical” to the second half of 2023. The May consumer price index release on Tuesday and the Federal Reserve policy announcement on Wednesday could impact the market significantly. Lee said that if the month-over-month reading of the May Core CPI is less than 0.3%, it would be a “positive surprise” for the market. He also pointed out that the fed funds futures market is pricing in about an 80% chance of a July rate hike. “If May Core CPI < 0.4%, then we see these odds dropping to zero for each month," he said. Lee's view is that inflation is tracking lower than the consensus and that it's just a matter of time before the lagged CPI/PCE reports reflect this reality. "And if this plays out, the Fed's pause will morph into a data-dependent mode, where the bar is raised for further hikes," he said.
FAQs:
What is the "fear gauge" on Wall Street?
The "fear gauge" on Wall Street is the Cboe Volatility Index (VIX). It measures the market's expectation of volatility over the next 30 days.
Why is Tom Lee emphasizing the impact of the VIX on this year's gains?
Tom Lee believes that investors are underappreciating the impact of the VIX on this year's gains. He points out that in the last 30 years, when the VIX is down year-over-year post-negative equity year, the median gain is 22%.
What events next week could impact the market significantly?
Two events next week could impact the market significantly according to Tom Lee. The May consumer price index release on Tuesday and the Federal Reserve policy announcement on Wednesday.
What is the May Core CPI?
The May Core CPI is the consumer price index excluding volatile food and energy prices. It is expected to be released on Tuesday.
“Least-recognized Market Positive: Wall Street’s Fear Gauge Experiences a Drop”
Wall Street’s “fear gauge” is being underappreciated by investors as a key driver of this year’s market gains, according to Fundstrat’s head of research, Tom Lee. The S&P 500 has seen almost 12% growth since Thursday’s close, and on Friday, it crossed above 4,300, reaching levels not seen since August 2022. Meanwhile, the Cboe Volatility Index (VIX), regarded as Wall Street’s preferred measure of market volatility, has dropped to around 13.65, which is near its lowest levels since the start of the Covid-19 pandemic inearly 2020. Lee said that, according to the firm’s work from December 2022, “VIX impact is the least appreciated” upside catalyst for stocks. Lee, who is one of the most significant bulls on Wall Street, forecasts that the S&P 500 will rise over 20% this year but pointed out that two events next week will be “critical” to the second half of 2023: the May consumer price index release on Tuesday and the Federal Reserve policy announcement on Wednesday. He suggested that if the May Core CPI is less than 0.4%, then the odds of the Fed rate hikes would drop to zero for each month, raising the bar for further rate hikes.