Financial market volatility has surged to its highest level this year, largely attributed to the tumultuous execution of President Donald Trump’s protectionist trade policies. Although volatility has not yet reached critical levels, investors should remain vigilant as growing concerns over tariffs might trigger a market upheaval.
The S&P 500’s implied volatility, as indicated by the VIX index—often referred to as Wall Street’s fear gauge—has reached its highest point since the Federal Reserve reduced interest rates in December. Over the past month, the VIX has nearly doubled, with a notable spike observed recently.
Similarly, the MOVE index, which measures implied volatility in the U.S. Treasury market, is at its highest level in four months, coinciding with a price rally in Treasuries instead of the expected selloff. Despite this increase in volatility, it remains below the levels seen during previous market crises.
The recent volatility rise does not reflect the ongoing surge in policy uncertainty, which, by certain metrics, is at an all-time high. JP Morgan analysts attribute the current moderation of volatility to retail investors’ propensity to “buy the dip,” which has provided a safety net for equities.
They point out that since the S&P 500’s peak in February, U.S. equity ETFs experienced only one day of outflows, with inflows exceeding $30 billion during this period. However, recent statements from the White House and escalating market turmoil suggest a potential spike in volatility as investors reconsider the wisdom of “buying the dip.”
U.S. Treasury Secretary Scott Bessent indicated that the economy is entering a “detox” period, while Trump acknowledged the possibility of recession during a recent interview. The optimism fueled by the “Trump bump” has dissipated, with the S&P 500 currently down almost 10% from its last peak and teetering near correction territory.
Despite some GDP models indicating that recession risks may be overstated, economic forecasts are becoming increasingly pessimistic. Morgan Stanley has lowered its GDP growth outlook for 2025, pointing to unsustainable equity valuations under these economic conditions.
Furthermore, any future tariff announcements from Trump are likely to provoke market sell-offs, whether due to fears of economic impact or resulting chaos from policy changes. With pressures mounting and the landscape evolving, investors may need to seek shelter from the storm of volatility.