The S&P 500's "fear gauge," which fell to pre-pandemic levels just a month earlier, has jumped 65% over the past week to its highest point since early March on what analysts say is concerning jobs and inflation data.
The Cboe Volatility Index, or VIX, climbed from 16.69 on May 7 to 27.59 on May 12. The index represents market expectations for volatility during the next 30 days.
The spike came as the S&P 500 fell by more than 4% after settling at a new, all-time high May 7.
"The VIX is skyrocketing after Wall Street got spooked from a disappointing nonfarm payroll report and a hotter-than-expected surge with consumer prices," said Edward Moya, a senior market analyst with OANDA, in an interview.
On May 7, the Bureau of Labor Statistics reported that the U.S. economy added 266,000 jobs in April, about a quarter of what most economists expected. The bureau reported May 12 that the consumer price index, a key measure of inflation, rose 4.2% in April from a year earlier, the fastest annual increase since September 2008.
"Treasury yields are on a rollercoaster ride and all this uncertainty and debate over what the Fed will do has triggered a wave of volatility across every asset class," Moya said.
Similar volatility is playing out in the U.S. Treasury market, with the benchmark 10-year yield climbing 32 basis points in March — from 1.42% to 1.74% — and falling back to 1.56% in mid-April. The yield, which has an inverse relationship with bond prices, settled at 1.69% on May 12.
Jim Polk, senior portfolio manager at Homestead Funds, said the run-up in the VIX occurred as investors saw the two primary tenets of the ongoing market rally — better economic data from a pandemic recovery and the Federal Reserve's ultra-loose monetary policy — at risk.
"The combination of higher inflation expectations and the surprisingly low April jobs figures have called these two tenets into question, resulting in both a higher VIX and lower market," Polk said. "Investors are concerned whether these tailwinds are transitory or not. A correction like this in the market is healthy, however, given the performance over the past couple of quarters. Expectations were high."
Equity markets are being dominated by the fear of climbing inflation, in spite of repeated assurances from Fed officials that these increases are only temporary, said Andrew Brenner, head of international fixed income at National Alliance Securities, in a May 13 note.
The VIX was trading below 24 in early afternoon trading May 13, a sign that the spike may be receding as the volatility index continues to trade lower as the U.S. economy transitions out of the global coronavirus pandemic.
"The fear gauge has had a bumpy ride down over the past year, and the recent spike is very much in line with the trend for flashes of elevated volatility interrupting the gradual decline," wrote Tim Edwards, managing director of index investment strategy with S&P Dow Jones Indices, in a May 13 note.
Paul Schatz, president of Heritage Capital, said the spike over the past week was likely similar to the spikes seen in September, October and January.
"All were temporary and episodic, which this one should be as well," Schatz said in an interview.
The S&P 500 was up about 0.6% in early afternoon trading May 13.