S&P 500 Plunges As Fed's Hawkish Stance Shifts Market Sentiment

The S&P 500 experienced its most significant decline in years following a Federal Reserve meeting that shook investor confidence. The benchmark index plunged nearly 3% late in the session after Fed Chair Jerome Powell signaled that further interest rate cuts would likely be paused, given that inflation remains well above the central bank’s 2% target.

As markets adjusted to Powell’s remarks, equity options markets revealed a dramatic shift in sentiment and positioning. The Cboe Volatility Index (VIX), a key gauge of expected volatility in the S&P 500, closed at levels unseen since the market volatility spike in early August. Meanwhile, the VVIX, which tracks the volatility of VIX options, surged to its highest point since early September.

These sharp moves in volatility indicators disrupted the relative calm that had characterized the market for much of the year. The VIX had been on track to average its lowest annual level in five years, but Wednesday’s surge highlighted the growing demand for protection against potential market swings. The spike in the VVIX signals a heightened appetite for VIX options, seen as a safeguard against more significant market turbulence.

Strategists are forecasting continued volatility into 2025, particularly with the potential changes following the incoming Trump administration. Factors such as tariff adjustments and geopolitical tensions could trigger further disruptions, keeping market participants on edge.

On Wednesday, measures of market skew, which reflect the demand for protection against further declines in major stock indexes, also spiked. The demand for downside protection was evident in a surge of VIX call buying, a trend that had already started to pick up in early December but accelerated sharply after the Fed’s latest update. This increase in skew suggests a growing concern among traders about the potential for more significant downturns in the months ahead.