JPMorgan Chase & Co. strategists forecast a rise in the Cboe Volatility Index (VIX) in 2024, marking a climb from its lowest point since pre-pandemic levels experienced this year. The extent of this increase, they suggest, hinges upon the economic vigour during the year ahead.
VIX Projections and Economic Factors
According to the bank’s Americas equity derivatives strategists, led by Bram Kaplan, the VIX is anticipated to trade at higher levels in 2024 compared to 2023. This projected elevation is contingent upon both the timing and severity of a potential recession, alongside the possibility of amplified fluctuations that could hinder short-term volatility sales.
The VIX, a crucial measure of market volatility, descended below 12.5, reaching its lowest point since January 2020. This decline coincided with a six-week winning streak in US stocks, reflective of optimistic sentiments surrounding a soft landing economically and an anticipated relaxation in central bank policies for 2024. Over the past five years, the average VIX has hovered around 21, highlighting the stark contrast from the recent dip.
Varying Scenarios and Predictions
Should an economic soft landing materialise, the strategists foresee an average VIX reading in the mid-to-high teens throughout 2024, notably different from this year’s average of around 17. However, the projection shifts if a moderate recession unfolds in the latter half of the year. In such a scenario, the anticipated average VIX reading might ascend to the low 20s, as outlined in the note by JPMorgan Chase & Co. analysts.
“These scenarios assume that geopolitical risks continue to simmer and periodically flare up, but that tail risks aren’t realized,” the strategists wrote. “Should a tail event occur — e.g. Middle East war spilling into a broader regional conflict, direct conflict between superpowers, etc. — we could see much higher VIX levels than outlined above.”
As a hedge, JPMorgan’s strategists recommended put-spread collars on the S&P 500 Index — composed of buying a put spread, while simultaneously selling a call option — as a “vanilla equity hedge.” The combined position offers lower-cost protection against a drop in equities prices while capping gains if the rally continues.
In research late last month, Goldman Sachs Group Inc. strategists also pointed to positions tied to the benchmark gauge, including put spreads and equity collars.
Goldman’s strategists were less convinced that market swings would intensify.
The group’s model indicated “a high probability of a low vol regime for most of the year,” citing “limited recession risk and tailwinds to global growth in 2024.”
Still, the strategists noted that the potential for higher volatility had increased, in part given a broad steepening in the yield curve.
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