- Investors have grown complacent as the bull market has raged on, but that placidity has been rocked amid the ongoing global equity selloff.
- Traders are now paying the most since the 2016 presidential election to protect against a decline in the S&P 500, while the Cboe Volatility Index — or VIX — has also spiked to a 14-month high.
For much of the stock market's blistering bull market run, investors have stayed remarkably calm, with measures of fear locked near historical lows.
However, it appears that the rapid global selloff that's rocked markets in recent days — including a 4% drop in the benchmark S&P 500 — has made traders re-think that stance.
The Cboe Volatility Index — or VIX — has seen a sudden gain, spiking 66% in just six trading days to the highest since Election Day 2016. In addition, investors are paying the highest premium since the election to protect against a decline in an exchange-traded fund tracking the S&P 500, relative to bets on an increase, according to Bloomberg data.
In other words, traders have been snapped out of complacency, and the escalating situation appears to have their attention to a degree not seen in 14 months.
And can you blame them for finally showing some worry? Given that the market spent months breaking new record highs seemingly everyday, a decline of this magnitude feels even more drastic.
The increase in the cost of downside protection comes amid repeated hedging recommendations from Wall Street strategists. Bank of America Merrill Lynch (NYSE:BAC) chief investment strategist Michael Hartnett has been saying for weeks that investor confidence has gotten overextended, and that traders should be guarding their gains any way they can.
Meanwhile, INTL FCStone macro strategist Vincent Deluard has taken it a step further, offering a handful of hedging suggestions for a landscape he acknowledges is much trickier to navigate than before.
Goldman Sachs (NYSE:GS) weighed in on Monday morning with a cautiously optimistic view, noting that while we're undoubtedly in the throes of a selloff, US indexes are still up in 2018. Still, the firm agrees with its Wall Street counterparts that it's better to be safe than sorry.
"Investors who are already long cash equities could instead consider purchasing puts as protection," Goldman Sachs chief US equity strategist David Kostin wrote in a client note. "Our derivatives strategists believe options are inexpensive relative to recent market moves."