While US stocks punch through record highs, the VIX index is signaling caution

Priced for perfection.
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Image: Reuters/Lucas Jackson
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US stock market investors are an optimistic bunch right now, betting that vaccines and government spending will inoculate the economy from the pandemic in 2021. But one index is showing at least some degree of caution.

While the S&P 500 index of large US stocks closed out 2020 at a record-high, the VIX index, often called the market’s “fear gauge,” has yet to return to levels seen before the pandemic erupted. The VIX tracks stock options tied to the S&P 500 index; it’s a gauge of traders’ expectations for the range of prices they expect the index to trade in over the coming month.

The benchmark is hovering at nearly double the level it was a year ago—suggesting a new normal relative to the placid expectations of recent years, and compared with the exuberance in the tech-heavy Nasdaq 100 that soared more than 45% last year.

“Vaccination is barely starting and we are living in a post-Covid world,” said Olivier Korber, a strategist at Société Générale. “The notion of ‘normality’ needs to be revisited, and its standards can hardly be the same than before the pandemic, which is still far to be over.”

For months, investors have been intensely focused on whether the US government would offer more support to workers and businesses, and on the prospects for a successful vaccine. They’ve gotten much of what they wished for: Congress came though with another slug of spending as a wave of Covid-19 infections mounts and as parts of the previous multi-trillion-dollar package of spending expired. Health officials in the UK and US have approved multiple vaccines, which are gradually getting into the arms of vulnerable people and frontline workers.

But timing still matters. While Western countries have started to roll out vaccines, it has been anything but smooth in most big developed economies, and it’s far from certain that authorities will be able to hit their targets for inoculating large swaths of their populations. Failure to do so would mean further business closures and travel restrictions that choke off economic growth. Government officials would have to contend with another round of fiscal support or face a deepening recession.

With that in mind, Korber thinks even Wall Street’s volatility traders are baking in a best-case scenario. The VIX “is very close to the post-Covid low,” he said. “In this regime, such a level can be read as to reflect almost the maximum degree of optimism that the market can have in a world where the Covid crisis is not over.”