The S&P 500 Index lost around 1.7% on Thursday. The U.S. markets logged their weakest day since Oct. 10, as investors dumped tech shares on waning expectations of a December interest rate cut and valuation concerns.
The CBOE Volatility Index added about 14% on Thursday, reflecting a clear uptick in market volatility and anxiety among investors.
Investor anxiety rose across Wall Street as traders grew concerned that the Fed may not deliver the December rate cut. According to Yahoo Finance, lower rates tend to lift the economy and support asset prices, despite the risk of higher inflation. A pause in rate cuts could put pressure on U.S. equities after their record run, much of which was driven by expectations of further easing.
According to the CME FedWatch tool, markets are anticipating a 49.6% likelihood of another interest rate cut in December, a sharp pullback from what was expected a month ago.
Wall Street has long been wary about a potential bubble in the AI sector. According to a CNBC article, leading tech leaders warned CNBC of a potential bubble in the AI space, reflecting rising industry anxiety over the sector’s rapidly inflated valuations.
Markets have lately been concerned about the capital flooding into the AI boom, clouding visibility on future revenue and profits and casting doubt on stretched valuations.
According to the abovementioned Yahoo Finance, AI valuations have climbed so steeply that many are comparing them to the dot-com bubble, whose collapse once slashed the S&P 500 by almost half.
The S&P 500 is increasingly shaped by the performance of Big Tech. With around 36% of the S&P 500 allocated to information technology, U.S. market investors face elevated concentration risks. If the AI-driven stock market bubble bursts, heavily tech-reliant investor portfolios may suffer significant losses.
Increasing exposure to volatility ETFs in the short term can be a winning move for investors. Taking precautions upfront is better than facing avoidable risks later. These funds have delivered short-term gains during periods of market chaos and may climb further if volatility continues.
Investors with a long-term horizon may be able to look past these near-term uncertainties, but in the current economic environment, volatility-focused funds and strategies are ideal for reassessing volatility exposure for investors with a short-term horizon.
With the potential for increased volatility, adding these ETFs may be a smart strategic move (See: all Volatility ETFs here).
