Wall Street’s fear indicator – the VIX – posted its second-biggest rise ever on Wednesday

Wall Street’s fear gauge – the VIX – rose by the second-highest percentage in its history on Wednesday after the Federal Reserve rattled the stock market by saying it would scale back its interest rate cutting campaign.

The CBOE volatility index rose 74% to close at 27.62, up from around 15 the day before. The rise is the second largest in history, following a 115% jump to above the 37 mark in February 2018, when there was an explosion in funds tracking the volatility index.

Wednesday’s move came after the central bank said it would likely cut interest rates just twice next year, instead of the four rate cuts it had forecast in September, alarming investors who wanted low interest rates to further fuel the bull market. The Dow Jones Industrial Average fell 1,100 points, posting its tenth straight loss.

Typically, a reading above 20 in the VIX indicates a higher level of fear in the market. However, the VIX has been below that level for most of this year, worrying investors who believed the market had become overly complacent.

The VIX is calculated based on the prices of put and call options on the S&P 500. A rise could indicate that investors are rushing to buy put options to protect themselves in the event of a decline.

Nevertheless, there was another significant increase in VIX in 2024. The third-largest rise in VIX in history occurred on August 5, 2024, as fears of a U.S. recession emerged and a significant easing in the yen carry trade. This caused the VIX to rise by around 65% and close above 38. On an intraday basis, the VIX briefly exceeded 65 on the day.

On Thursday, the VIX last hovered just above 20, down more than 25% from the previous day.