July 25, 2025 • 7 mins
Just days from US President Donald Trump's next tariff deadline, stock markets have hit record highs. Market volatility - as measured by the VIX Index - is at its lowest level in months. Are investors feeling zen, or do we need to rethink how we measure fear in the markets? Our markets reporter Valerie Tytel joins host Stephen Carroll to discuss.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News. I'm Stephen Carroll and
this is Here's Why, where we take one new story
and explain it in just a few minutes with our
experts here at Bloomberg. The back and forth between the
fin and White House, that's not healthy. Some of those
(00:22):
price pressures from tariff starting to creep in.
Speaker 2 (00:25):
The fear you can have is that it's not only
goods inflation coming from tariffs, it's also the upside rigial
services inflation coming from wages. It's really beneath the surface
that we do still expect to see the impact of
policy changes.
Speaker 1 (00:36):
Some of these larger structural issues remain.
Speaker 2 (00:40):
You know, if you're walking on a lake and the
ice is frozen and sound safe, but when you start
hearing cracks, and that's what I feel like, it's too late,
once you go through the ice.
Speaker 1 (00:49):
There are plenty of big issues out there for investors
to worry about. But just days out from Donald Trump's
next tariff deadline, stock markets have hit record highs and
latility as measured by the VIX known as Wall Streets
Fear Index, has all but disappeared. So our investors just
feeling zen. Whereas the VIX missing something. Here's why there
(01:11):
isn't more fear in the fear index. Our market support
of Valerie title joins me. Now for more Valerie. First
of all, why is the VIX known as a measure
of fear.
Speaker 2 (01:23):
Essentially, what we know about markets is they tend to
go down in very sharp magnitudes over short amount of
time versus going up in a large magnitude in a
short amount of time. So we have had days where
the stock market drops twenty percent. Right nineteen eighty seven,
Black Monday stock market was down twenty percent in one session.
(01:43):
We have never had a session where the stock market
is up twenty percent. So that is something that's called skew.
And why that's important is because most assets, when you're
looking at the volatility of them, have a significant right tail.
So there is securfitally higher risk of a larger drop
to the downside than there is of a large rise.
(02:05):
And so when we look at volatility measures, essentially when
we see something like the VIX spike, the market is
essentially pricing in the market falling by a large amount.
So volatility is a great measure. But what we need
to remember is that normally, when volatility is rising. Something
bad has happened to this asset because we know we're
more likely to fall off a cliff in the equity
(02:26):
market than we are to one day walk in and
the equity market it's up twenty percent. So what exactly
does the VIX measure? Well, that's a fun thing to explain, Steven.
So let's just take where the VIX is trading right now.
It's trading at sixteen, and that is giving us a
log normal volatility over the next three months.
Speaker 1 (02:44):
So it's crazy already.
Speaker 2 (02:47):
So essentially what that means is that to back that
out into a daily implied percentage swings of the equity market,
we have to divide it by the square root of
the number of how many trading days are in the year,
and that's two hund and fifty two, so by the
square of tifty two, which is roughly sixteen. So with
the VIX at sixteen now, it's implying a one percent
daily swing. Sixteen divided by sixteen is one one percent
(03:09):
daily swing in the equity market. And how it back
set out. It's an index that tracks various amounts of
options on the S and P five hundred call options
put options straddles all around a horizon that expire in
twenty three days to thirty seven days, and it kind
of waits that to a thirty day benchmark. So what
this is telling us is the VIX at sixteen, we
(03:29):
divide that by sixteen, telling us it's implying a one
percent daily swing over the next thirty days.
Speaker 1 (03:36):
So pretty low. But how has the VIX tracked events
like Donald Trump's tariff announcements for example.
Speaker 2 (03:43):
So at times where the actual equity market starts to
move a lot, you normally see the VIX rising as well.
You know that happened back at the beginning of the
year April second, the VIX shot up to sixty in
the days after Trump's announcement, and that was implying around
to three and a half maybe four percent daily swing
in the equity market. So it is a forward looking measure,
(04:05):
but it normally does take into account what's happened in
you know, the brief history. So like with the Vicks
trading at sixteen right now, we think about what's on
the event horizon over the next three months. Well, we
don't have a lot of central bank decisions, you know,
they're all on holiday in August. August is normally a
low liquidity time where there's not a lot of trading,
(04:25):
so it captures into that horizon, but then also capture
things going on in September, so there's another FED decision,
there's another payrolls decision. You know, we do have these
ongoing trade negotiations which are supposed to come to fruition
on August first. So it does capture in a lot
of potential risk events. But what it's essentially telling us
now is it's not too worried about it. It's at
quite a low number for where it's been trading earlier
(04:46):
this year.
Speaker 1 (04:46):
It looks like a bit of a shrug, to be honest.
Is there somewhere else then that we should be looking
for an idea of whether investors are worried or how
worried they are. Is something like gold a better measure?
Speaker 2 (04:59):
You know, some maybe argue that it is, But if
you think about gold being driven by other factors like
central banks increasing their allocation, you know, mainly out in Asia,
China being a big buyer of gold, it can also
tell you different things. But it is useful sometimes on
a big risk off move that you do seek gold
rising but it's driven by other factors as well. But
(05:19):
in a nutshell, what the VIX is kind of telling
us right now is that the market has really gotten
a tougher skin around Trump trade headlines, around all of
the policy uncertainty under Trump's second administration. It just seems like,
you know, where before maybe the market was overreacting to
every tariff threat, at the moment, the market is kind
of looking through it in some way, thinking that that
(05:41):
we more understand Trump's style of you know, setting the
bar really high with the number and then negotiating it
down lower. So in some way, maybe the market is
just believing that these trade agreements will lower the number
of terrafs, and in some way believing that maybe after
Trump's tariffs are set, that there's really not a lot
of surprise left on Trump's economic agenda. He's already passed
(06:02):
the tax bill a few weeks ago. So it's definitely
confusing many investors why all of a sudden the market
is starting to look through this policy uncertainty, Whereas at
the beginning of the year, policy uncertainty was at high.
You know, the equity market was falling out of bed
nearm in April, you know, SB five hundred went down
near twenty percent. It just seems like the market has
gotten a tougher skin, and that's reflected and how the
(06:25):
VIX is trading.
Speaker 1 (06:26):
So is the VIX still a useful measure?
Speaker 2 (06:29):
Oh, definitely, I mean it is a useful measure in
a way that risk managers likely still use it as
a as a big input into evaluating the riskiness of
a equity portfolio. So these measures of implied volatility are
definitely used by risk managers to assess how risky a
portfolio is. And then at the same time, you know,
(06:49):
it is telling us something. It's telling us that the
market isn't worried. So obviously, Stephen, we have known many times,
I mean, especially this year, that the market gets it wrong,
and it gets it wrong all the time by a
big magnitude. So let's say we fast forward three months,
and let's say a lot of chaos has happened in
between now and October. There's obviously a high likelihood what
the VIX is pricing now isn't going to come to fruition. Right,
(07:12):
it can't necessarily predict the future, but it's a good
measure of how investors are viewing riskiness and implied volatility
in the equity market, and that does bleed into other
assets as well.
Speaker 1 (07:24):
Okay, Valerie Tattel, our market supporter, thank you very much.
For more explanations like this from our team of three
thousand journalists and analysts around the world, go to Bloomberg
dot com slash explainers. I'm Stephen Caroll. This is here's why.
I'll be back next week with more. Thanks for listening.
Bloomberg Audio Studios, Podcasts, radio News. I'm Stephen Carroll and
this is Here's Why, where we take one new story
and explain it in just a few minutes with our
experts here at Bloomberg. The back and forth between the
fin and White House, that's not healthy. Some of those
(00:22):
price pressures from tariff starting to creep in.
Speaker 2 (00:25):
The fear you can have is that it's not only
goods inflation coming from tariffs, it's also the upside rigial
services inflation coming from wages. It's really beneath the surface
that we do still expect to see the impact of
policy changes.
Speaker 1 (00:36):
Some of these larger structural issues remain.
Speaker 2 (00:40):
You know, if you're walking on a lake and the
ice is frozen and sound safe, but when you start
hearing cracks, and that's what I feel like, it's too late,
once you go through the ice.
Speaker 1 (00:49):
There are plenty of big issues out there for investors
to worry about. But just days out from Donald Trump's
next tariff deadline, stock markets have hit record highs and
latility as measured by the VIX known as Wall Streets
Fear Index, has all but disappeared. So our investors just
feeling zen. Whereas the VIX missing something. Here's why there
(01:11):
isn't more fear in the fear index. Our market support
of Valerie title joins me. Now for more Valerie. First
of all, why is the VIX known as a measure
of fear.
Speaker 2 (01:23):
Essentially, what we know about markets is they tend to
go down in very sharp magnitudes over short amount of
time versus going up in a large magnitude in a
short amount of time. So we have had days where
the stock market drops twenty percent. Right nineteen eighty seven,
Black Monday stock market was down twenty percent in one session.
(01:43):
We have never had a session where the stock market
is up twenty percent. So that is something that's called skew.
And why that's important is because most assets, when you're
looking at the volatility of them, have a significant right tail.
So there is securfitally higher risk of a larger drop
to the downside than there is of a large rise.
(02:05):
And so when we look at volatility measures, essentially when
we see something like the VIX spike, the market is
essentially pricing in the market falling by a large amount.
So volatility is a great measure. But what we need
to remember is that normally, when volatility is rising. Something
bad has happened to this asset because we know we're
more likely to fall off a cliff in the equity
(02:26):
market than we are to one day walk in and
the equity market it's up twenty percent. So what exactly
does the VIX measure? Well, that's a fun thing to explain, Steven.
So let's just take where the VIX is trading right now.
It's trading at sixteen, and that is giving us a
log normal volatility over the next three months.
Speaker 1 (02:44):
So it's crazy already.
Speaker 2 (02:47):
So essentially what that means is that to back that
out into a daily implied percentage swings of the equity market,
we have to divide it by the square root of
the number of how many trading days are in the year,
and that's two hund and fifty two, so by the
square of tifty two, which is roughly sixteen. So with
the VIX at sixteen now, it's implying a one percent
daily swing. Sixteen divided by sixteen is one one percent
(03:09):
daily swing in the equity market. And how it back
set out. It's an index that tracks various amounts of
options on the S and P five hundred call options
put options straddles all around a horizon that expire in
twenty three days to thirty seven days, and it kind
of waits that to a thirty day benchmark. So what
this is telling us is the VIX at sixteen, we
(03:29):
divide that by sixteen, telling us it's implying a one
percent daily swing over the next thirty days.
Speaker 1 (03:36):
So pretty low. But how has the VIX tracked events
like Donald Trump's tariff announcements for example.
Speaker 2 (03:43):
So at times where the actual equity market starts to
move a lot, you normally see the VIX rising as well.
You know that happened back at the beginning of the
year April second, the VIX shot up to sixty in
the days after Trump's announcement, and that was implying around
to three and a half maybe four percent daily swing
in the equity market. So it is a forward looking measure,
(04:05):
but it normally does take into account what's happened in
you know, the brief history. So like with the Vicks
trading at sixteen right now, we think about what's on
the event horizon over the next three months. Well, we
don't have a lot of central bank decisions, you know,
they're all on holiday in August. August is normally a
low liquidity time where there's not a lot of trading,
(04:25):
so it captures into that horizon, but then also capture
things going on in September, so there's another FED decision,
there's another payrolls decision. You know, we do have these
ongoing trade negotiations which are supposed to come to fruition
on August first. So it does capture in a lot
of potential risk events. But what it's essentially telling us
now is it's not too worried about it. It's at
quite a low number for where it's been trading earlier
(04:46):
this year.
Speaker 1 (04:46):
It looks like a bit of a shrug, to be honest.
Is there somewhere else then that we should be looking
for an idea of whether investors are worried or how
worried they are. Is something like gold a better measure?
Speaker 2 (04:59):
You know, some maybe argue that it is, But if
you think about gold being driven by other factors like
central banks increasing their allocation, you know, mainly out in Asia,
China being a big buyer of gold, it can also
tell you different things. But it is useful sometimes on
a big risk off move that you do seek gold
rising but it's driven by other factors as well. But
(05:19):
in a nutshell, what the VIX is kind of telling
us right now is that the market has really gotten
a tougher skin around Trump trade headlines, around all of
the policy uncertainty under Trump's second administration. It just seems like,
you know, where before maybe the market was overreacting to
every tariff threat, at the moment, the market is kind
of looking through it in some way, thinking that that
(05:41):
we more understand Trump's style of you know, setting the
bar really high with the number and then negotiating it
down lower. So in some way, maybe the market is
just believing that these trade agreements will lower the number
of terrafs, and in some way believing that maybe after
Trump's tariffs are set, that there's really not a lot
of surprise left on Trump's economic agenda. He's already passed
(06:02):
the tax bill a few weeks ago. So it's definitely
confusing many investors why all of a sudden the market
is starting to look through this policy uncertainty, Whereas at
the beginning of the year, policy uncertainty was at high.
You know, the equity market was falling out of bed
nearm in April, you know, SB five hundred went down
near twenty percent. It just seems like the market has
gotten a tougher skin, and that's reflected and how the
(06:25):
VIX is trading.
Speaker 1 (06:26):
So is the VIX still a useful measure?
Speaker 2 (06:29):
Oh, definitely, I mean it is a useful measure in
a way that risk managers likely still use it as
a as a big input into evaluating the riskiness of
a equity portfolio. So these measures of implied volatility are
definitely used by risk managers to assess how risky a
portfolio is. And then at the same time, you know,
(06:49):
it is telling us something. It's telling us that the
market isn't worried. So obviously, Stephen, we have known many times,
I mean, especially this year, that the market gets it wrong,
and it gets it wrong all the time by a
big magnitude. So let's say we fast forward three months,
and let's say a lot of chaos has happened in
between now and October. There's obviously a high likelihood what
the VIX is pricing now isn't going to come to fruition. Right,
(07:12):
it can't necessarily predict the future, but it's a good
measure of how investors are viewing riskiness and implied volatility
in the equity market, and that does bleed into other
assets as well.
Speaker 1 (07:24):
Okay, Valerie Tattel, our market supporter, thank you very much.
For more explanations like this from our team of three
thousand journalists and analysts around the world, go to Bloomberg
dot com slash explainers. I'm Stephen Caroll. This is here's why.
I'll be back next week with more. Thanks for listening.
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