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JPMorgan Chase & Co. strategists predict a rise in stock market volatility in 2024, reversing the trend seen this year, which saw the Cboe Volatility Index (VIX) hitting its lowest level since before the pandemic. The magnitude of this increase is contingent on the strength of the economy, according to the bank’s Americas equity derivatives strategists, led by Bram Kaplan.
The VIX, a key measure of market worry, recently dipped below 12.5, reflecting the optimism associated with a six-week winning streak in US stocks and expectations for a soft landing and easing of central bank policies in 2024. The VIX, which experienced significant volatility during the Covid outbreak, has averaged around 21 over the past five years.
In the event of an economic soft landing, JPMorgan’s strategists anticipate the VIX to have an average reading in the mid-to-high teens in 2024, compared to an average of around 17 this year. However, if a moderate recession occurs in the second half of the year, the average VIX reading could potentially reach the low 20s.
The strategists noted that these scenarios consider ongoing geopolitical risks with intermittent flare-ups but assume that extreme tail risks, such as a broader regional conflict arising from a Middle East war or direct conflict between superpowers, remain unrealized. They cautioned that a tail event could result in much higher VIX levels than outlined in their base scenarios.
To hedge against increased volatility, JPMorgan’s strategists recommended put-spread collars on the S&P 500 Index. This strategy involves buying a put spread while simultaneously selling a call option, providing a vanilla equity hedge. The combined position offers cost-effective protection against a decline in equity prices while capping gains if the market continues to rally.
In contrast, Goldman Sachs Group Inc. strategists, in research last month, expressed less certainty about heightened market swings. Their model indicated a high probability of a low volatility regime for most of the year, citing limited recession risk and favorable global growth tailwinds in 2024. However, they acknowledged that the potential for increased volatility had risen, particularly due to a broad steepening in the yield curve.
