The VIX, or CBOE Volatility Index, has fluctuated wildly over the past decade, leaving investors to wonder if volatility will explode or remain tame in 2024. After spiking to all-time highs during the 2008 financial crisis, the VIX settled into a period of unusually low volatility from 2017 to early 2020. However, volatility came roaring back in early 2020 amidst the Covid-19 pandemic. With the potential for new virus variants, high inflation, rising interest rates, and geopolitical conflicts, some strategists warn that volatility could spike again in 2024. However, others argue that volatility is likely to remain contained barring any major shocks.

The VIX measures expected volatility in the S&P 500 index over the next 30 days based on options pricing. Known as the “fear gauge,” the VIX tends to spike during periods of uncertainty and market turmoil. In 2008, the VIX shot above 80 as the financial crisis triggered violent swings in stocks. But from 2017 to early 2020, the VIX mostly traded below 20 thanks to stable economic growth, low inflation, and accommodative central bank policies. This period of eerie calm became known as the “great volatility compression.”

However, in early 2020, the VIX soared above 80 again as Covid-19 plunged the economy into recession. The rollout of vaccines and stimulus spending helped calm markets later that year. But new virus variants, supply chain problems, and labor shortages kept volatility elevated in 2021-2022 relative to the pre-pandemic years. The VIX has averaged around 20 over the past year versus just 11 in 2017.

Looking ahead, the potential for faster Fed tightening, persistently high inflation, and fallout from Russia’s invasion of Ukraine suggest volatility could remain elevated in 2024. But much depends on whether these risks materialize or fade.

On the hawkish side, some strategists warn the Fed could aggressively hike rates to combat inflation, sparking volatility. “If inflation remains stubbornly high, the Fed may need to induce a recession with several 50 or 75 basis point hikes,” said Bob Browning, chief investment officer at Northern Trust Wealth Management. “That could rattle markets and send the VIX back near 30.”

Meanwhile, geopolitical conflicts threaten to inject volatility spikes. “Tensions with Russia and China have risen, and future flare ups could whipsaw stocks,” noted Morgan Stanley equity strategist Michael Wilson.

However, some analysts believe inflation and geopolitical risks are largely priced into markets already. “We expect inflation to moderate this year as supply chains normalize, taking pressure off the Fed to aggressively hike,” said Goldman Sachs economist Jan Hatzius. “Barring a major military escalation, geopolitical turmoil likely won’t spill over too much into markets.”

Indeed, volatility does not always rise when risks materialize. For instance, the VIX barely reacted when Russia invaded Ukraine in February 2022. “Stocks can sometimes climb a wall of worry,” said Interactive Brokers chief strategist Steve Sosnick.

Moreover, some options traders have bet on the VIX falling. “The VIX futures curve is downward sloping, indicating expectations for lower volatility,” said Stacey Gilbert, co-head of derivatives strategy at Susquehanna International Group. “Traders are positioned for calmer markets.”

The VIX also tends to mean-revert after big spikes higher. “Even if volatility picks up, it likely won’t reach the extremes of 2020 since the economy is on much firmer ground today,” added Oanda senior market analyst Edward Moya.

U.S. stocks have also shown resilience during periodic volatility flare ups since 2020. “Markets have become adept at looking past short-term risks,” said LPL Financial equity strategist Jeffrey Buchbinder. “We expect that pattern to continue barring a major fundamental derailment.”

To be sure, the risk of an unforeseen “black swan” event sparking volatility remains. New Covid variants, a global cyber attack, a terror strike, or escalating geopolitical conflicts could emerge.

But absent such a shock, analysts expect inflation and growth risks are unlikely to roil markets too much. “Investors have built up a wall of worry, leading to muted reactions to negative news,” said RidgeStone Capital Partners portfolio manager Chris Verrone. “We see volatility remaining largely range-bound in 2024.”

Even some prominent volatility bears have turned more sanguine. “Systemic risk appears low, and we no longer see a recession on the horizon,” said Variant Perception macro strategist Jonathan Tepper. “While volatility could periodically pop higher on emerging risks, it likely won’t reach extreme levels next year.”

In conclusion, while unpredictable geopolitical events or aggressive Fed tightening present volatility risks, the VIX is unlikely to explode higher in 2024 barring a major shock. Investors have already priced in economic and geopolitical uncertainties. Meanwhile, signals like the downward-sloping VIX futures curve and stock market resilience suggest volatility could remain more muted. As long as the economy avoids recession and inflation continues moderating, the fear gauge may stay relatively tame. However, even without an extreme spike, periodic turbulence still seems likely. So buckling up for some choppy waters would be prudent even as the VIX remains contained within reasonable levels.

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