Tracking US equity volatility as Fed cut looms

The "September effect" often results in the worst month of the year for US stocks. (Historians debate whether this is a legacy of mutual funds' fiscal year timing, a "back to school" syndrome where investment managers choose to sell underperformers and change their strategies after summer ends, or just chance.) The Lehman collapse took place in September 2008, as did the sliding markets that preceded the 1929 and 1987 crashes.

The S&P 500 indeed started September 2024 with its worst week of the year, but it had recovered some of those losses as of the time of publication.

However, August 2024 was the month that saw the most volatility in years, with markets hit by a weak employment report that renewed US recession fears. We can examine this phenomenon using volatility indices for the S&P 500 and Nasdaq 100, which are sourced from Exchange Data International. (We invite you to explore EDI's comprehensive coverage of more equity market indices.)

As our first chart shows, S&P 500 volatility (known as VIX for its ticker symbol) spiked to 38.5 on Aug. 5, the highest since the pandemic-related panic seen in early 2020. It's also notable how volatility had receded during and after the Fed's great tightening cycle of 2022-23, amid optimism about resilient growth and a "soft landing."

Subsequent data releases confirmed that the labor market was weakening; past non-farm payrolls reports were revised lower. The August job report, meanwhile, missed expectations, pushing VIX to another spike of 22.38 on Sept. 6.

With the Federal Reserve's Sept. 17-18 rate decision considered extremely likely to result in a rate cut, there is more scope for equities to stay volatile before the month is over -- as markets assess bullish or bearish comments from Jay Powell.

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