Stock Market Volatility Returns as Trade War and Tech Bubble Concerns Resurface

A spike in volatility has followed a long stretch of modest daily moves for stocks. (NYSE)

Key Points

• The S&P 500 experienced its weakest session since spring, falling 2.7% due to renewed trade tensions and political risks.
• The Cboe Group’s VIX index, a volatility gauge, rose above 22 points, indicating expected daily S&P 500 swings of 1.4%.
• Benchmark 10-year Treasury note yields fell to 4%, the lowest since late March, while gold and silver prices increased.

The serene summer and autumn stock market rally, marked by months of uninterrupted gains and little volatility, looks set to disappear as quickly as the evening light this month. Trade tensions, worry over tech valuations, and political risks are back.

Stocks had their weakest session since the spring on Friday as the S&P 500 fell 2.7% in response to President Donald Trump’s threat of an extra 100% tariff on Chinese goods, itself a response to Beijing tightening rules governing exports of rare-earth metals. The benchmark recovered around half of that slump on Monday after Trump hinted at a trade detente with Beijing, only to fall again on Tuesday as China unveiled sanctions on American-owned units of a South Korean shipping company

Last week’s slide snapped a run of 33 S&P 500 trading days without a 1% move in either direction, the longest stretch since before the pandemic.

“We’ve been a bit spoiled with this rally,” said Ryan Detrick, chief market strategist at Carson Group, during an interview with CNBC on Monday. “So maybe some October spookiness and volatility is perfectly normal.”

The Cboe Volatility Index , or VIX, which has been dormant since the “Liberation Day” selloff of early spring, is now trading firmly north of the 22-point mark. It is the highest since early May, after 3½ months in which it only once traded north of the 20-point mark.

At around 22.75, the market’s benchmark volatility gauge suggests options traders are expecting daily swings of around 1.4%, or 95 points, for the S&P 500 over the next month. That is up from around 63 points in late September, when the benchmark was trading at its current level of 6650 points.

Richard Saperstein, chief investment officer at New York-based Treasury Partners, thinks markets have largely moved on from the impact of tariff risks and are instead focused on the start of the third-quarter earnings season. Nonetheless, he says, “trade tensions are still in the background and can cause bouts of short-term volatility.”

“When stock valuations rise, like they have in recent months, they can be more prone to a headline-driven decline,” he says.

The trade-war rhetoric has also triggered a notable rally in the bond market. Benchmark 10-year Treasury note yields, perhaps the most important interest rate in global financial markets, are now trading at around 4%, the lowest since late March. Gold is also testing new highs on an almost daily basis, and silver prices rose past $50 an ounce for the first time.

The defensive tone as third-quarter earnings reports begin to roll in, and the first trading days of the bull market’s fourth year, could signal a tougher road ahead for investors riding the S&P 500’s six month rally.

Adding to the concern is that the federal government shutdown entered its second week on Tuesday, with markets now bereft of key economic data releases. Investors are growing more worried about how a prolonged closure would affect economic growth.

The Federal Reserve is also gently pushing back on market assumptions of a long series of interest-rate cuts, while political turmoil in Europe and Japan is making investors less willing to take risks. And a flurry of deals from privately held OpenAI to secure chips used to power artificial intelligence has also raised concerns over a valuation bubble in the world’s hottest technology trade.

Others, however, remain bullish.

“Now entering its fourth year, this bull market has been solid, with gains nicely ahead of average historical three-year bull market returns, largely on strength in megacap technology stocks riding the AI wave,” Jeffrey Buchbinder and Adam Turnquist, LPL Financial’s chief equity and technical strategists, respectively, said in a recent note.

“While past performance is no guarantee of future results, the combination of resilient economic growth, forthcoming fiscal stimulus, a dovish Fed, and strong corporate earnings—especially in tech—suggests this bull still has legs,” the pair said.

Write to Martin Baccardax at martin.baccardax@barrons.com