Analytical volatility is worse than market whiplash

CAMBRIDGE, United Kingdom — To the extent that financial historians ever refer back to August 2024, I suspect it would be for the craziness of the first three days of the month when equity prices tumbled as investors dumped their darling stocks and sent the VIX (Wall Street's "fear index") soaring to levels not seen since the start of the coronavirus pandemic in 2020. All this disorder is likely to be attributed to the "bad technicals" associated with an overleveraged Japanese yen "carry trade" and junior, inexperienced traders whose superiors were away on summer holidays.

But while the volatility was indeed eye-popping, it did not take long for the damage to be reversed. By the end of August, stocks had more than fully recovered, the VIX was back at its normal levels, and there were indications of traders piling back into the carry trade (borrowing in a low-interest currency to invest in higher-yielding assets elsewhere). Moreover, this recovery was validated and reinforced by United States Federal Reserve (Fed) Chairman Jerome Powell's dovish speech at the Jackson Hole Economic Symposium, where he declared that "the time has come for policy to adjust," "the direction of travel is clear," and the Fed does "not seek or welcome further cooling in labor-market conditions."