By Shawn Jaryno, Associate Broker, EXIT on the Hudson Realty, NJ
Introduction
As of today, global markets are showing significant signs of distress. The Dow Jones Industrial Average dropped 600 points on Friday, and futures are indicating a further decline. At 8:25 A.M. the DOW Futures were -1,245.00. Japan’s Nikkei Index suffered a 12% loss—its most significant drop since 1987. Meanwhile, the VIX, commonly known as the “fear gauge,” has surged past 28 and continues to climb. As of 8:12 AM the VIX is showing at 56.00 These developments raise the critical question: are we witnessing the beginning of a major market crash?
The Role of the VIX and Market Volatility
The VIX measures market expectations for volatility over the next 30 days, with higher values indicating greater fear and uncertainty. Historically, VIX levels above 20 have been associated with heightened market volatility. Last weeks spike above 28 suggests that investors are increasingly anxious about the near-term future.
Historical Context:
· Dot-com Bubble (2000-2002): The VIX rose above 15 in early 1999, signaling growing market instability. About 12-14 months later, the market peaked, followed by a significant downturn.
· Global Financial Crisis (2007-2008): The VIX crossed above 15 in mid-2007, and the market began its steep decline just a few months later, culminating in a severe global financial crisis.
Given this historical precedent, the current VIX level above 28 is alarming. It suggests that the market is in a fragile state, with the potential for further declines in the coming days and weeks.
Global Market Declines: Early Warning Signs
The recent sharp declines in global markets, including Japan’s 12% drop, indicate a broader shift in investor sentiment. Historically, such moves have often preceded more significant downturns. For example, before the 1929 crash that led to the Great Depression, the market experienced periods of sharp declines followed by brief recoveries. Similar patterns were observed before the 2000 and 2008 crashes.
Current Market Dynamics:
· U.S. Markets: The Dow’s 600-point drop on Friday, coupled with further declines in futures, suggests that U.S. markets are entering a phase of increased volatility.
· Global Markets: The sharp declines in Asia and other regions reflect a global sense of unease, reminiscent of the contagion effects seen during previous market crashes.
Yield Curve Inversion: Another Warning Sign
The ongoing inverted yield curve, which has persisted for 24 months, is another significant warning sign. Historically, an inverted yield curve has been one of the most reliable predictors of recessions. The fact that this inversion has lasted so long increases the likelihood of a severe economic downturn.
Is This the Beginning of a Crash?
While it’s impossible to predict the exact timing of a market crash, the combination of a high VIX, significant global market declines, and a prolonged inverted yield curve suggests that the risk of a severe correction is high.
What to Watch For:
· Further VIX Increases: If the VIX continues to rise, particularly above 30, it would indicate that market fear is escalating, increasing the likelihood of a crash.
· Continued Market Declines: Watch for further drops in major indices like the Dow and S&P 500. Persistent declines could confirm that the market is entering a more severe phase of correction.
· Economic Indicators : Pay close attention to other economic indicators, such as unemployment rates and consumer confidence, which could provide additional insights into the health of the economy.
Conslusion:
The current market conditions—characterized by a rising VIX, sharp global market declines, and a prolonged yield curve inversion—suggest that we may be at the start of a significant economic downturn.
Given the similarities between current conditions and those preceding past market crashes, the next few weeks will be critical in determining whether this is the beginning of a full-blown crisis.