[News Terms] Growing Market Anxiety Amid Low 'Gongginoi' Fear Index in the US

When VIX is Usually High, Prediction is Difficult and Stocks Fall
Quiet Market Fuels 'Anxiety'... Similar to Pre-Financial Crisis
When Market is Calm, Investors Tend to Take High-Risk Investments

As the U.S. stock indices continue to hit record highs day after day and the market's 'fear index' remains unusually low, investor psychological anxiety is growing, the Wall Street Journal (WSJ) reported on the 16th (local time).

The 'fear index' is a nickname for the Volatility Index (VIX), an indicator created by the Chicago Board Options Exchange (CBOE) to measure stock market volatility.

The VIX is one way to measure volatility based on options of the Standard & Poor's (S&P) 500 index, which represents the U.S. stock market. Options are derivatives whose prices fluctuate directly with stock price changes, and the VIX measures the hidden volatility of the underlying stocks based on these option prices. It is an index that measures the expected future market volatility reflected in stock index option prices, and because it spikes sharply when the stock index plunges, it is also called the fear index.

Traders are working at the New York Stock Exchange (NYSE) in the United States.
[Photo by AFP New York/ Yonhap News]

A high VIX means that expectations of increased volatility are acting on the stock market, while a low VIX means that expectations of decreased volatility are influencing the stock market.

Typically, when volatility is high, i.e., when the VIX is high, stock prices fluctuate sharply, making it difficult for market participants to predict stock prices. This uncertainty usually leads to a decline in the stock market. When volatility is low, i.e., when the VIX is low, it is relatively easier to predict stock price rises and falls. In this case, stock prices move steadily, and the stock market is considered to be rising because the future is easier to predict.

However, the stock market can fall even when the VIX is low, and it can rise even when the VIX is high. When the VIX is low, the market is stable, so expected returns are low, which may lead investors to choose markets other than stocks. Conversely, when the VIX is high, the market is unstable (high risk), but the potential for high returns can attract large investments in the stock market, causing it to rise. Ultimately, the VIX serves as a reference indicator for investors but cannot be a definitive measure.

According to WSJ and CBOE, the VIX fell below the 12 level on the 13th. The VIX has recently remained unusually low around the 12 level, having fallen below 12 several times since the end of last month. The VIX dropping below 12 is the first time in about 4 years and 6 months since November 2019.

In fact, the U.S. stock market has shown both a strong bull market and low volatility this year. The S&P 500 index has hit new highs 29 times this year, rising about 14% compared to the end of last year. Meanwhile, days when the S&P 500 index's daily fluctuation exceeded 1% have been rare, and days with fluctuations greater than 2% have occurred only once.

Experts point to the solid growth of the U.S. economy, contrary to earlier recession forecasts, along with increased corporate profits and a continued slowdown in inflation as the background for this trend.

However, WSJ noted that past cases show such an extremely quiet market environment cannot last long. A representative example is the VIX movement during 2005?2007 before the financial crisis. During this period, the VIX remained unusually low around 12 until it surged above 80 during the 2008 financial crisis.

Experts are concerned that if the economy continues strong growth while the market remains calm, investors may lower their guard and engage in high-risk investments.

David Kelly, Chief Global Strategist at JP Morgan Asset Management, said, "Bubbles tend to burst in truly quiet situations," adding, "Bubbles can grow to enormous sizes, and they burst when the wind picks up." Kelly pointed out that as recession fears disappear, investors are increasingly betting heavily on sectors like technology stocks that have consistently performed well."