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Wall of worry ( DEALBOOK)

The U.S. stock market, as measured by the S&P 500, tumbled more than 3 percent yesterday, dragging it deeper into bear market territory. This morning, futures markets suggest there will be a rebound, but the S&P is still well on track to record its 10th weekly decline of the past 11 weeks. Bull markets are often said to climb a wall of worry, with occasional slips along the way. When bear markets rappel, there are also periodic pauses for breath. That has been the theme of late, with investors veering from relief that policymakers are taking aggressive actions to rein in inflation to fear about the effect those actions may have on economic growth. One of the best bets recently has been volatility. The VIX volatility index, which is commonly called the fear index because it tracks investors demand for a type of financial instrument that offers protection against market drops, has more than doubled in the past year, to well over 30. The index had fallen to around 15 at times during the second half of last year, its lowest level since the start of the pandemic. The reasons for the stock markets downward lurches are well established at this point: A mixture of supply chain issues and a hot economy has caused prices to surge. In order to fight inflation, the Fed is raising interest rates aggressively. Investors are worried that the Feds efforts will tip the economy into recession. Theres also a lingering pandemic, and a war in Europe. Continue reading the main story A MESSAGE FROM DARKTRACE Protect your critical infrastructure with A.I. Cybercriminals are targeting critical infrastructure, seeking huge ransom payments or looking to cause disruption. As I.T. and O.T. continue to converge, unified coverage of both environments has become crucial. Darktraces Self-Learning A.I. is the only technology that autonomously defends against novel cyberattacks, taking targeted action to stop attackers in their tracks. LEARN MORE > Darktrace Logo The stock market itself can be an economic concern, too. In all, the drop in stocks this year has erased about $12 trillion in value from investors portfolios. Thats already more than the $8 trillion decline in 2008, during the most severe financial crisis in a century, although on a percentage basis the 2008 drop was bigger. Over time, the rise and fall of stocks can propel and drag the economy via something economists call the wealth effect when people feel poorer, even if their losses are mostly on paper, they may not spend as much, denting the economy. Analysts say the market isnt likely to recover until there are signs that inflation is under control. Lower inflation would, in turn, take pressure off the Fed and other central banks to raise rates quickly, reversing the negative feedback loop the market and the economy seem to be stuck in. For now, investors are betting that volatility is here to stay. Normally, when the VIX spikes, bets on where the index will trade a few months in the future are much lower than the current level. Thats not the case now. Investors are currently betting the VIX will end the year at just under 30, down only slightly from today, and much higher than the longer-term trend. The VIX has averaged about 20 over the past five years.

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