Spiking Volatility Puts Financial Advisors on Notice

Spiking Volatility Puts Financial Advisors on Notice

In classic September fashion, the S&P 500 is inching closer to correction territory.

Wealth Management Editor
Reviewed by: Kent Thune
Edited by: Sean Allocca

The recent wave of market volatility is reinforcing September’s reputation as the scariest month for stocks and could force financial advisors and investors to search for a safe place to hide

The S&P 500, which is down more than 6% from its August peak and getting closer to correction territory, is starting to reflect growing concerns over the simultaneous upward pressure on inflation, interest rates and the U.S. dollar. 

“It’s a changing landscape for stock investors; people were expecting near term rate cuts,” said Deron McCoy, chief investment officer at Signature Estate & Investment Advisors. 

McCoy’s reference to the Federal Reserve’s recent signal that interest rates will remain higher for longer, which has shone fresh light on weaker economic data, has become a wet blanket for equities. 

The summertime rally that saw stocks ride on the back of hopes about taming inflation and a soft landing for the economy, has since morphed into a “no-landing type outcome,” McCoy said. 

“It means, we’re not there yet,” he added. “We’re not done with rate hikes and inflation is still here.” 

Volatility, the VIX and Financial Advisors

That rising anxiety is being measured by the Cboe Volatility Index, otherwise known as the VIX. Climbing to around 19 in midday trading Tuesday, the VIX is hitting levels not seen since May. 

“Given that the S&P is down 6% [from the recent high], I would have thought the vix would be jumping above 20,” said Paul Schatz, president of Heritage Capital. 

“For a decline of this magnitude, the VIX should be higher,” he added. “It’s not really showing enough fear. I think that’s still coming.” 

The S&P, which is up more than 12% from the start of the year, was down more than 1% in midday trading Tuesday, at 4,291. 

Schatz believes the benchmark could fall below 4,200 over the next few weeks. 

“In other words, the window for a bottom is open, but there could be some pain before we get there,” he said. 

Jim Carroll, senior wealth advisor at Ballast Rock Private Wealth, said even though market pullbacks can be uncomfortable, investors should not be surprised by what’s unfolding this week. 

“We saw two initial bursts of volatility in August as the S&P retreated by about 5%,” he said. “The rally that followed brought the VIX back below 13, which is a level of calm we haven’t seen since before the COVID outbreak in 2020.” 

Financial Advisors Tackling the VIX 

Eric Metz, CEO at SpiderRock Advisors, is also not surprised by the VIX spike.  

“Given the absolute levels of the VIX cooling off over the summer months, the S&P’s September sell off from that low VIX base definitely warrants an uptick in the VIX level,” he said. “It’s important to remember the VIX is still below long-term averages, and given the year-to-date performance, protecting gains this year is more affordable than last year.” 

In terms of hedging the current volatility spike, McCoy said the only strategy is to turn toward what is rising. 

“Find an asset that benefits from rising rates, like floating rate treasuries, and the energy sector will benefit from the rising prices of oil and energy,” he said. “But the rising dollar is harder because we’re all U.S. dollar investors, but we think the dollar is closer to the top at this point.” 

Contact Jeff Benjamin at [email protected] and find him on X: @BenjiWriter 

Jeff Benjamin is the wealth management editor at etf.com, responsible for coverage related to the financial planning industry. This includes writing, hosting podcasts, webinars, video interviews and presenting at in-person events.

Jeff is a veteran journalist with more than 30 years’ experience covering the financial markets. He has won more than two dozen national and regional awards for his reporting. He most recently worked as a senior columnist at InvestmentNews where he wrote about investment products and strategies, as well as the broader financial planning industry. Prior to that, Jeff worked as an analyst at Cerulli Associates where he researched and wrote reports on the alternative investments industry. Jeff also worked as a money management reporter at Dow Jones Newswires, where he covered the mutual fund industry.

Based in North Carolina, Jeff is a former Marine and has a bachelor’s degree in journalism from Central Michigan University.