In a forward-looking analysis, JPMorgan and Co. strategists are forecasting an upswing in the Cboe Volatility Index (VIX) for 2024, indicating a departure from its lowest point experienced this year, pre-pandemic. The magnitude of this anticipated increase, they posit, is contingent on the economic vigor that unfolds in the coming year.
VIX Projections and Economic Factors:
Led by Bram Kaplan, the bank’s Americas equity derivatives strategists foresee the VIX trading at higher levels in 2024 compared to the preceding year. This projection hinges on the timing and severity of a potential recession, coupled with the possibility of heightened fluctuations that could impede short-term volatility sales.
The VIX, a pivotal measure of market volatility, recently dipped below 12.5, marking its lowest point since January 2020. This decline coincided with a six-week winning streak in US stocks, reflecting optimistic sentiments surrounding a soft economic landing and an anticipated relaxation in central bank policies for 2024. Over the past five years, the average VIX has stood at around 21, underscoring the sharp contrast from the recent dip.
Varying Scenarios and Predictions:
In the event of an economic soft landing, the strategists foresee an average VIX reading in the mid-to-high teens throughout 2024, notably different from this year’s average of around 17. However, projections shift if a moderate recession unfolds in the latter half of the year. In such a scenario, the anticipated average VIX reading might ascend to the low 20s, as outlined in a note by JPMorgan Chase & Co. analysts.
Acknowledging potential geopolitical risks, the strategists caution that unforeseen events, such as a Middle East war expanding into a broader regional conflict or direct conflicts between superpowers, could lead to significantly higher VIX levels.
As a hedge, JPMorgan’s strategists recommend put-spread collars on the S&P 500 Index, involving buying a put spread while simultaneously selling a call option — a “vanilla equity hedge.” This combined position offers lower-cost protection against a drop in equities prices while capping gains if the rally continues.
Goldman Sachs Group Inc. strategists, however, express less conviction about an intensification of market swings. Their model indicates “a high probability of a low vol regime for most of the year,” citing limited recession risk and tailwinds to global growth in 2024. Nonetheless, they acknowledge that the potential for higher volatility has increased, partly due to a broad steepening in the yield curve.