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Persistently lofty levels in volatility indexes indicate investors are still bracing for potential shake-ups in the U.S. benchmark S&P 500 index, reflecting unease over the scale of the market recovery.

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Investors are betting on big swings in U.S. stock prices even as benchmark equity indexes push steadily higher and darlings like Tesla Inc. (TSLA-Q) and Amazon.com Inc. (AMZN-Q) surge to new records.

The Chicago Board Options Exchange’s (CBOE) volatility index (VIX) of equity market volatility, often referred to as Wall Street’s fear gauge, remains 41 per cent above its historic average at almost 30. Another longer-term measure of U.S. stock volatility is 50 per cent above its long-term average, according to the CBOE.

The indexes are well below the highs they struck during the sharp market falls at the depths of the coronavirus crisis earlier this year. But the persistently lofty levels indicate investors are still bracing for potential shake-ups in the U.S. benchmark S&P 500 index, reflecting unease over the scale of the market recovery since March.

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“Today’s level for the VIX is perfectly indicative of how uncertain this situation is,” says Randy Frederick, vice-president of trading and derivatives at Charles Schwab Corp. in Austin, Tex. “One of the challenges of this environment is that we are all basically trying to fit historical models and patterns [on to] today’s scenario. The reality is the scenario today is unique.”

Aggressive action from the U.S. Federal Reserve Board and the U.S. federal government has helped to ward off a more pronounced financial and economic crisis from the spread of COVID-19. Their interventions have helped fuel a recovery rally in stocks. The tech-heavy Nasdaq Composite hit a record high on Tuesday, while the S&P 500 came within 6.2 per cent of its all-time high.

Investors, both professional and retail, have a wide range of views over what happens next. The number of call options, which enable users to capitalize on rallies, continues to push higher, indicating an undercurrent of optimism.

Still, Kristina Hooper, chief global market strategist at Invesco Ltd. in New York, says the fears that have kept the VIX elevated compared with historical norms are also reflected in other markets, including U.S. government bonds. The yield on the 10-year Treasury bond remains close to a record low at 0.67 per cent, reflecting persistent investor demand for haven assets. Gold, which is often bought during times of crisis, has rallied 18 per cent this year and on Tuesday was at an eight-year high.

As the economic damage from the outbreak becomes clear, “there is a fear of fundamentals ruining the party,” says Ms. Hooper. She also warns that additional support was needed from Washington.

“The need for ongoing fiscal stimulus is critical,” she says, adding that without it, especially if infections continue to rise, “that could be something of a perfect storm that could manifest in late summer and early fall.”

Many U.S. states are struggling to contain the coronavirus outbreak. Cities around the country have slowed their reopening plans, while states including Texas that had pushed to ease lockdown measures are tightening restrictions again after a sharp rise in cases.

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November’s presidential election presents another potential source of volatility. Mr. Frederick says he would be “shocked” to see the VIX fall below 20 before the nation goes to the polls.

© The Financial Times Limited 2020. All Rights Reserved. FT and Financial Times are trademarks of the Financial Times Ltd. Not to be redistributed, copied or modified in any way.

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