On Monday, the S&P 500 (^GSPC) rebounded to surpass its previous closing level before the onset of the conflict in Iran. This sharp recovery reflects a broader trend seen in the financial markets over a brief period.
The CBOE Volatility Index (^VIX), often used as a barometer for market anxiety, spiked above 30 during the early stages of the war—indicative of significant market distress. However, it has since retreated to a level below 20, suggesting a return to more stable trading conditions. This turnaround occurred in just eight trading sessions, which is notably rapid compared to last year’s market response to the “Liberation Day” sell-off that took 26 sessions to recover.
It’s important to note, however, that the severity of the volatility spike plays a crucial role in the speed of the recovery. Last year, the VIX hit an extreme peak of over 80, while this time the maximum was around 35. Consequently, the relatively smaller shock this time around has contributed to a quicker decline back below the 20-magnitude threshold.
Recent patterns indicate a significant shift in how volatility spikes are perceived by investors. Previously, such spikes would often take months to return to acceptable levels. In contrast, the current trend suggests that investors are adjusting quickly, treating these volatility bursts as opportunities rather than bear markets that should be closely followed. This shift means investors are inclined to “buy the dip” promptly, as this strategy has proven effective in the current climate.
Steve Sosnick, a strategist at Interactive Brokers, posits that the VIX should not merely be seen as a “fear index”. Instead, it serves as an indicator of demand for protective measures against downside risks and reflects broader shifts in options market pricing. Regardless, the broader market implications are clear.
Last year’s S&P 500 required 88 sessions to return to its all-time high following a substantial sell-off; however, the current market is already nearing its pre-crisis high just 53 sessions post the March 30 low, missing the record by a mere 0.5%.
This rapid rebound and the current trading mentality underline the resilience of the market and the changing behaviour of investors.
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