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A cocktail of interest rate anxiety and geopolitical tensions is keeping U.S. stock investors defensive and driving Wall Street’s most closely watched volatility gauge to its highest level in half a year.

With the S&P 500 down nearly 5% from its late March record closing high, the Cboe Volatility Index broke above 20 overnight as tensions between Iran and Israel escalated, its highest since late October.

Often called Wall Street’s “fear gauge,” the VIX is an options-based measure of investor demand for protection against near-term stock swings. It has climbed in recent weeks as signs of stubborn inflation eroded expectations for how deeply the Federal Reserve will cut interest rates this year and as worries grow over a spreading conflict in the Middle East.

The S&P 500 is still up around 5% year-to-date and stock bulls are hopeful a strong earnings season could bolster investor confidence in the weeks ahead.

Nevertheless, some believe a jump in volatility is warranted following a run that has seen the S&P 500 gain as much as 28% from its October lows.

“In hindsight the market was a little overbought a few weeks ago and there was a little bit too much optimism, exuberance, FOMO,” said Joe Tigay, portfolio manager for Rational Equity Armor Fund, using the acronym for “fear of missing out.”

“You put some challenges in its way, such as, rising interest rates and a potential war ... it makes a lot of sense to back off,” he said.

The VIX has not closed above 20 for 121 straight days, the longest such streak since 2018.

Stocks were weaker on Friday after reports Israel launched an attack on Iranian soil, in the latest tit-for-tat exchange between the two foes. The S&P 500 was recently down 0.4%, on pace for its sixth straight session of losses, the longest losing streak since October 2022.

Market participants noted the VIX is trading 1.26 points higher than its May futures, the index’s largest premium to front month futures in four months. That is in contrast to a 0.75 point discount the front month futures have typically traded at over the last decade, data from LSEG showed.

Analysts said the so-called “inversion” highlights investors’ preoccupation with near-term threats to the market. It “tells us people are more concerned about the here and now,” said Chris Murphy, co-head of derivative strategy at Susquehanna Financial Group.

Tigay, of the Rational Equity Armor Fund, noted that while the VIX has climbed to its highest point in months, it remains below levels that have in the past marked a crescendo of investor fears.

“Maybe that could be a sign that there could be some more downside to come,” he said.

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