Quarterly Outlook
Upending the global order at blinding speed
John J. Hardy
Global Head of Macro Strategy
Investment and Options Strategist
Summary: Markets experienced a sharp surge in volatility, with the VIX hitting its highest level since 2020 and the S&P 500 falling over 6% in two days, driven by renewed trade tensions and macro uncertainty. For investors, understanding the structural and emotional drivers behind these moves is key to staying grounded in turbulent markets.
In just a matter of days, financial markets have gone from orderly to chaotic. The S&P 500 has dropped to its lowest level in nearly a year, and the Cboe Volatility Index (VIX)—often called Wall Street’s “fear gauge”—has spiked to levels not seen since the early months of the pandemic. For long-term investors, the natural question is: what’s going on, and what does it mean for portfolios?
This article breaks down the recent rise in market volatility, explains some of the key drivers behind it, and outlines a few possible ways the situation might evolve from here—without offering specific investment advice.
Volatility is a measure of how much asset prices move, especially over short timeframes. When markets are calm, volatility tends to stay low. When uncertainty or risk increases, volatility rises.
The most common volatility benchmark—the VIX—reflects expectations for price swings in the S&P 500 over the next 30 days. It closed above 45 this week, a level rarely seen outside of major market stress events. Historically, the VIX tends to rise during moments of crisis or uncertainty, such as in early 2020 during the COVID shock, or during major geopolitical disruptions.
This latest surge has been driven by a mix of factors:
Volatility is not unusual—but a few features of the current environment stand out.
First, the market reaction appears to have caught many off guard. Several measures of positioning suggest that investors were not heavily hedged going into the week. When China’s tariff retaliation hit headlines, it triggered a rush to reduce risk, which may have exaggerated the sell-off.
Second, we’ve seen an unusually high level of correlation across assets. In the Nasdaq 100, for instance, 99 out of 100 stocks were down in a single session. This kind of synchronized selling is relatively rare, and it’s often seen during moments of high emotional stress in markets.
Third, the size and speed of the moves have been exceptional. The S&P 500 fell more than 6% in two trading sessions, erasing over $5 trillion in market value. While steep drawdowns are part of market history, they can feel abrupt when they occur outside of earnings season or central bank action.Another unique aspect of this moment is the number of overlapping risk factors. The market is not only reacting to trade tensions between the U.S. and China, but also to domestic policy signals. For instance, recent public statements from former President Donald Trump have criticized Federal Reserve Chair Jerome Powell for not cutting interest rates faster, highlighting tensions between political and monetary priorities. While the Fed is an independent institution, uncertainty about how monetary policy will evolve—especially under political pressure—can influence investor confidence.
It’s impossible to predict what happens next in the markets. But investors can think through a few general scenarios that might shape how volatility plays out in the coming weeks:
In this scenario, markets digest the shock, macro data remains stable, and investor sentiment gradually improves. Volatility drifts lower, and price stability returns. Historically, some volatility spikes have been short-lived—especially when no systemic financial risk is involved.
This is often what causes the most discomfort for long-term investors. Volatility doesn’t always resolve quickly. It can stay elevated for weeks or months if uncertainty lingers, especially around policy decisions, earnings, or geopolitical tensions. This was the case during parts of 2011, 2015, and mid-2022.
If sentiment continues to deteriorate, and earnings or economic data weakens, a deeper correction or even a bear market becomes possible. This isn't a forecast—but it's a scenario that investors have seen before in past cycles, such as during 2008 or early 2020.
It’s also possible that we see a mix of these paths: an initial rebound followed by more volatility, or periods of calm followed by renewed selling.
Additional unknowns may also influence how markets behave. So far, the European Union has not issued a response to the recent escalation in tariffs between the U.S. and China. Any future retaliation—whether from Europe or other major economies—could increase uncertainty and weigh on global growth expectations. Trade policy is often unpredictable, and markets tend to react quickly to headlines, especially when risk appetite is already low.
Similarly, ongoing tension between fiscal and monetary leadership in the U.S.—such as differing views between policymakers and the Federal Reserve—could add to short-term volatility. Even if those tensions don’t result in immediate policy changes, they may affect how investors interpret future interest rate moves or inflation expectations.
It’s natural to feel concerned during sharp market declines. But volatility itself isn’t new—it’s part of the market’s long-term rhythm. What often matters most is how investors respond to it.
Historically, markets have experienced many episodes of high volatility and large drawdowns, only to recover over time. Staying diversified, avoiding emotional decision-making, and maintaining perspective has often helped investors stay on track through turbulent periods.
That said, these periods can also be a time to revisit investment plans, understand what’s in a portfolio, and evaluate whether current risk exposure still aligns with long-term goals.
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