The Dow Jones Industrial Average is down more than 20% from where it was trading a month ago, but the worst probably isn’t over yet for the U.S. stock market.
The Chicago Board Options Exchange’s Volatility Index (VIX) suggests there could be another financial crisis on the horizon. The VIX has long been considered a “fear gauge” for the stock market, and its recent surge shows investors are very, very afraid.
The stock market’s seemingly bulletproof rally is officially over as shares plummeted into bear territory. But the VIX levels suggest equities could still have a long way to go to hit rock bottom.
On Thursday, VIX spiked north of 63.45, its highest level since December 2008. The VIX spiraled as high as 89.53 that year as the financial crisis reached an inflection point.
Before the VIX reaches those dizzying heights, the index would need to gain a further 33%. That’s certainly not out of the question in today’s ultra-volatile environment.
While the numbers look concerning on the surface, there are some other VIX trends flashing warning signals. It closed above 40 for the fourth day in a row on Wednesday. That kind of prolonged fear hasn’t been present in the stock market since April 2009 during the throes of the financial crisis.
Not only that, but the index is on track to rise 280% this year. In 2008, the VIX only returned 108%. According to Mark Longo, CEO of The Options Insider, that disparity is surprising.
That spread is remarkable to see what’s going on out there in the [VIX]… We may be in a new volatility regime for the foreseeable future.
With all of that on the table, it’s tough not to panic. But stay the course is precisely what Citigroup’s CEO Michael Corbat is advising. He emphasized that what’s happening on Wall Street isn’t a result of weakness among U.S. banks.
Unlike in 2008, banks are far more prepared for a recession if the economic pain from coronavirus continues.
“This is not a financial crisis,” Corbat said. “The banks and the financial system are in strong shape and we are here to help.”
Corbat is right. Fed stress tests and more stringent loan requirements have helped insulate U.S. banks. But that doesn’t mean they are immune to an economic downturn.
The most likely source of pain for financial institutions will be the Fed’s efforts to prop up the economy with interest rate cuts.
The bank’s most recent rate cut certainly hit banks’ net interest margins hard, and if the U.S. central bank acts as many are expecting, more easing is likely on the way. While big banks like Citigroup can withstand more easing, that could be the final nail in the coffin for regional banks.
By all accounts, a financial crisis—should it occur—will look totally different from the one we saw in 2008. But that doesn’t mean it won’t be just as painful.
U.S. firms have been taking on excessive debt over the past few years as cheap loans and a booming economy encouraged irresponsible borrowing.
Coronavirus fears put the breaks on economic growth suddenly, causing near-term pain. Some companies have already succumbed to the virus’ impact. It’s only a matter of time before liquidity becomes a wide-spread problem.
According to National Institute of Allergy and Infectious Diseases Director Anthony Fauci, time isn’t going to be on the stock market’s side when it comes to coronavirus.
He claims coronavirus is ten times more deadly than the flu. If the U.S. doesn’t start taking containment efforts more seriously, the outcome could be disastrous.
Bottom line: It’s going to get worse… If we don’t do very serious mitigation now, what’s going to happen is we’re going to be weeks behind. It is going to be totally dependent on how we respond to it…
If we are complacent and don’t do really aggressive containment and mitigation, the number [of cases] could be way up and be involved in many, many millions.
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