Will the Summer Heat Make the Market Sweat?

May 31, 2023 | Peter Como, Research Associate

This chart description is for illustrative purposes only and its accuracy cannot be guaranteed. Please see full disclosures at end of PDF document in the web post. General description: Two-line chart comparing Russell 1000 performance and VIX behavior during U.S. debt ceiling crises. Typically, when the VIX increases, markets perform badly, reflecting investor uncertainty, and during debt ceiling crises, that mostly holds true. The most recent crisis has had less of an impact on both VIX and Russell 1000 performance holding relatively steady. Please contact our team for the full dataset. Chart subtitle: Market volatility has remained relatively muted throughout May’s debt ceiling negotiations. Chart visual description: Left y-axis is labeled “Russell 1000” and ranges from 0 to 3,000. Right y-axis is labeled “VIX” and ranges from 0 to 60. X-axis shows time in 7-month increments, beginning in January 2010 with labels up to May 2023. Russell 1000 line is plotted in very dark green and VIX line is plotted in dark teal. Debt Ceiling Crises periods are plotted with solid shading in light tan behind lines: one from April to November 2011, one from January to October of 2013, one in July to December of 2021, and the current, which began in April 2023. Chart source: Federal Reserve Bank of St. Louis, Yahoo Finance as of May 30, 2023. End chart description. See disclosures at end of document.

With June and the Treasury’s estimated X-date quickly approaching, the debt ceiling issue came to a head over the weekend. While the spending deal reached between President Biden and House Speaker McCarthy still needs to be approved by Congress, it is an important milestone in the U.S. avoiding its first-ever default. While that worst-case scenario would have had catastrophic impacts on the economy, markets — as measured by the CBOE Volatility Index (VIX), known as the fear index — remained relatively calm. The VIX is measured using option activity and gauges the market’s appetite for volatility. Usually, the market and the VIX are negatively correlated, meaning the VIX increases as markets go down. As shown in the above chart, during times of stress, including debt ceiling uncertainty, the VIX tends to be more dynamic, with sharper jumps and falls. With markets having spent the last year heavily focused on inflation, labor markets, and the path of interest rates, which now seem at least near the peak, debt ceiling negotiations were overall taken in stride by equity markets. It is generally accepted that a VIX level above 30 indicates more investor uncertainty, which we have seen reached multiple times over the last few years, though during the month of May, the VIX peaked around 20. As noted, while the House and Senate still need to consider the bill this week, the most likely outcome is the debt ceiling bill is signed into law before the U.S. would have had to default on its debt obligations, removing one more headwind for markets this year.

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