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By Joseph Adinolfi

The revival of the U.S.-China trade war has ended a streak of summer calm that had brought about the lowest volatility since January 2020

The stock market’s “fear gauge” is back above its long-term average.

After one of the quietest summers for the stock market in years, Wall Street’s fear gauge has once again shot higher as investors fret that a trade standoff between the U.S. and China could escalate further.

The Cboe Volatility Index VIX, better known as the VIX, or Wall Street’s “fear gauge,” traded as high as 22.76 on Tuesday, its highest intraday level since May 23, when it traded as high as 25.53, according to Dow Jones Market Data. By the time the market closed, the VIX had moved well off its earlier highs. The index ended the day above 20, a level with some significance.

Since the VIX’s inception in the early 1990s, its long-term average sits just below 20. As a result, investors tend to see this level as the line in the sand between a relatively calm market, and one that is starting to look a bit more panicked.

The level of the VIX is based on trading activity in options contracts tied to the S&P 500 SPX that are due to expire in roughly one month. It is seen as a proxy for how worried traders are about the possibility that stocks could be due for a nosedive. After all, volatility tends to rise more quickly when the market is falling.

A summer lull

Looking back, there were signs that investors were beginning to feel a bit too complacent.

Stocks trundled higher all summer with few interruptions. This placid trading ultimately sent the three-month realized volatility for the S&P 500 to its lowest level since January 2020 last week, according to FactSet data and MarketWatch calculations.

Realized volatility is a calculation that measures how volatile a given index or asset has been in the recent past. The VIX, which measures implied volatility, attempts to gauge how volatile investors expect markets will be in the immediate future.

For a while, the VIX trended lower alongside realized volatility for the S&P 500. But around Labor Day, the two started to diverge.

This could mean a couple of different things, according to portfolio managers who spoke with MarketWatch. The first is that investors increasingly preferred to bet on further upside in the stock market using call options instead of actual shares. Call options on the S&P 500 will deliver a payoff if the index rises above a predetermined level before a given time, which is known as the expiration date.

It might also mean that some traders were scooping up put options, which act like a form of portfolio insurance. Wary of myriad risks that could upset the apple cart following a record-setting rebound earlier in the year, some investors may have preferred to hedge their downside risk, while holding on to their stocks, so as not to miss out on any further gains.

Signs that the market might be bracing for some upcoming turbulence first started to emerge in late September. Between Sept. 29 and Oct. 3, the S&P 500 and the VIX rose simultaneously for five straight sessions. That hadn’t happened since at least 1996, according to an analysis from Carson Group’s Ryan Detrick.

Seeing both the VIX and S&P 500 trend higher hinted that the market’s streak of calm might soon be coming to an end, said Michael Kramer, portfolio manager at Mott Capital Management.

“The tinder was there for something like Friday to occur,” said Mike Thompson, co-portfolio manager at Little Harbor Advisors.

“You just needed that spark to trigger it,” Mott Capital’s Kramer said.

While the U.S.-China trade tensions remain far from settled, Thompson and his brother, Matt Thompson, also a co-portfolio manager at Little Harbor Advisors, are keeping an eye out for any indication that a bigger burst of volatility might lie ahead.

Investors have largely blamed the selloff for the revival of trade tensions between the U.S. and China. On Friday, President Donald Trump threatened 100% tariffs on all Chinese goods imported into the U.S. in retaliation for Beijing stepping up export controls on rare earth metals.

Then on Tuesday, Beijing sanctioned U.S. subsidiaries of a South Korean shipping firm, sparking a global stock-market selloff that had largely reversed by the time the closing bell rang out on Wall Street.

But according to the Thompson brothers, the U.S.-China tariff dance has started to feel a little too familiar for it to be a real cause for concern. Investors appear to be catching on to the pattern of escalation, followed immediately by de-escalation, as each side vies for maximum leverage.

A more plausible threat to market calm, in their view, would be the ructions in the credit market. On Tuesday, JPMorgan Chase & Co. (JPM) Chief Executive Jamie Dimon warned about the potential for more credit problems after the bank lost money on a loan to bankrupt subprime auto lender Tricolor. Trouble in the space could get worse after a long period where conditions in the credit market were relatively favorable.

On Friday, BlackRock (BLK) and other institutional investors asked for their money back from Point Bonita Capital, a fund managed by the investment bank Jefferies (JEF), after the bankruptcy of auto parts supplier First Brands Group saddled the fund with big losses.

“We’re keeping an eye out for whether there is another shoe to drop,” Matt Thompson said.

U.S. stocks were on track to finish mostly higher on Tuesday, until Trump dropped a Truth Social post accusing China of a “Economically Hostile Act” for refusing to purchase soybeans from American farmers. That caused the S&P 500 to finish 0.2% lower, while the Nasdaq Composite COMP ended down 0.8%. Of the three major U.S. indexes, only the Dow Jones Industrial Average DJIA managed to finish higher. Meanwhile, the Russell 2000 RUT, an index of small-cap stocks, quietly notched another record closing high.

-Joseph Adinolfi

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  10-14-25 1642ET
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