A strategist at J.P. Morgan said that after falling to the lowest level since before the outbreak of the epidemic this year, one of the key indicators for measuring the level of concern in the stock market will rise in 2024, and its magnitude depends on how strong the US economy is. The US stock derivatives strategist for Komo, headed by Bram Kaplan, wrote in a report on Friday that the Chicago Board Options Exchange VIX Volatility Index “will generally be higher in 2024 than in 2023, and its increase will depend on the timing and severity of the final recession,” as well as sell-offs that may inhibit short-term fluctuations.

The VIX Volatility Index previously fell below 12.5 to its lowest level since January 2020. The reason is that the US stock market continued its upward trend for six consecutive weeks, reflecting people's hopes for a soft economic landing in 2024 and the Fed's relaxation policy. As the COVID-19 pandemic disrupts markets and economies, this closely watched market volatility indicator has averaged around 21 over the past 5 years.

With a soft landing for the economy, strategists expect the average reading of the VIX Volatility Index to be between 17 and 19 by 2024. The index's average for this year is around 17. The report said that if there is a moderate recession in the second half of next year, this average may rise to around 20.

The strategists wrote, “These scenarios assume that geopolitical risks continue to brew and erupt regularly, but tail risks do not materialize. If late-end events occur — such as the Middle East war spreading into a wider regional conflict, direct conflict between superpowers, etc. — we may see a much higher volatility index than above.”

As a hedge, J.P. Morgan's strategists recommend the S&P 500 bearish spread collar (collar) strategy, which is to buy a bearish spread while selling a call option as a kind of “common stock hedge.” The consolidated position provides low-cost protection against falling stock prices, while limiting earnings as the stock market continues to rise.

In a study at the end of last month, Goldman Sachs Group strategists also mentioned positions linked to the benchmark index, including put option spreads and stock hedging. However, Goldman Sachs strategists are not convinced that market volatility will increase. The bank's model shows that “it is likely that there will be low volatility for most of next year” because “the risk of a recession is limited, and global economic growth will be smooth in 2024.” However, strategists point out that the possibility of increased volatility has increased, partly because the yield curve is generally steeper.

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