Investors cling to crash protection despite sizzling US stock market rally

Investors are increasingly hedging against market risks, as rising tail risk indexes and VIX skew reflect caution over tariffs, Fed policy, and global conflicts despite U.S. stocks hitting record highs.

But several barometers gauging uptake for protection against extreme market swings - such as the Nations TailDex Index and Cboe Skew- are picking up. While the rise in these indexes does not necessarily mean investors expect catastrophic events, they suggest elevated caution in the face of several weighty risks, including the potential of an inflationary snap-back to ructions in global trade next year.

One such risk came to the fore late on Monday, when Trump pledged big tariffs on Canada, Mexico and China - detailing how he will implement campaign promises that could trigger trade wars.
Though U.S. stocks largely shrugged off the comments, Trump’s broadside evoked flashbacks to the trade-fueled market swings that took place during his first term, bolstering the case for portfolio hedging.

Amy Wu Silverman, RBC Capital Markets head of derivatives strategy, said investors are guarding against so-called fat tail risks, options parlance for higher expected probabilities of extreme market moves.

"While investors broadly remain long equities, the tails are fatter," she said. "This is partly from a rise in geopolitical risk premium and certainly potential policy risk as Trump returns to the presidency and potentially enacts tariffs and other measures."

The Nations TailDex Index, an options-based index that measures the cost of hedging against an outsized move in the SPDR S&P 500 ETF Trust, has risen to 13.64, double its post-election low of 6.68. The index is higher now than it has been about 70% of the time over the past year.

Cboe Skew index, another index that indicates the market's perception of the likelihood of extreme price movements, on Monday closed at a two-month high of 167.28.VIX call options, which offer protection against a market sell-off, also shows some of this demand to protect against "tail risks." VIX three-month call skew - a barometer of the strength of demand for these contracts - is hovering near the highest level in over five years, according to an analysis by Susquehanna Financial Group.

, opens new tab, another index that indicates the market's perception of the likelihood of extreme price movements, on Monday closed at a two-month high of 167.28.

Tags

News Stocks