Financial markets will tolerate uncertainty at the margin. But markets will punish unpredictability when volatility takes hold across asset classes.
It is likely that we have entered a period of volatility across asset classes as increasingly tumultuous geopolitics and economic policies affect investor evaluations of risk.
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Volatility became part of the fabric in the financial markets in the past year, with the equity and bond markets reacting to the crisis of the week.
The April Liberation Day spike in the VIX, which measures volatility in the S&P 500, was higher than the spike on 9/11, with only the financial crisis and pandemic spikes higher.
In all, there were 15 instances when the VIX spiked by at least two standard deviations between Feb. 1 last year and Jan. 23.
Most of these spikes were in reaction to changes in tariff policies, and to concerns over the overvaluation of tech stocks.
In 2024 by comparison, there were only six instances of two standard-deviation spikes.
The spikes in the Treasury market followed the same pattern, while the downward trend in volatility over the course of the year was a function of the steadying influence of monetary policy and the range trading of interest rates.
The takeaway
The spikes in U.S. equity volatility last year coincided with the uncertainty surrounding policy changes, particularly those concerning trade, the functioning of the supply chain and the health of the economy.
Equity prices were also subject to changing perceptions of tech-sector valuation. While that uncertainty remains, we can expect volatility spikes to continue.
