The stock market is on edge as investors brace for potential turbulence ahead. Options traders are actively seeking protection against a possible market crash, according to the latest data from Cboe Global Markets. Mandy Xu, an analyst at Cboe Global Markets, reported a surge in demand for deep out-of-the-money call options tied to the Cboe Volatility Index, known as the VIX or Wall Street’s “fear gauge.” These contracts would pay off if the S&P 500 experiences a significant downturn.
Joseph Adinolfi, a markets reporter, noted that the heightened demand for these options reflects growing apprehension among investors about the stock market’s direction in the coming months. Several factors are fueling investor concerns, including uncertainty about geopolitics and prices, increasingly strained consumers as tariffs raise costs for U.S. businesses, and a rising risk of recession. The Federal Reserve faces a dilemma: Should it raise interest rates to curb inflation caused by tariffs or cut rates to prevent a potential recession?
The course of action depends on inflation trends and economic growth forecasts. Tariffs are contributing to high business and consumer uncertainty. Since President Donald Trump took office, consumer and business confidence has declined.
The University of Michigan’s preliminary index of consumer sentiment dropped in February, and a post-election rise in small-business confidence was reversed, according to Vistage Worldwide. New tariffs imposed on March 4 on goods from Canada, Mexico, and China could result in higher prices for American consumers. Goods from Mexico and Canada face a 25% tariff, while tariffs on Chinese products are now at 20%, up from 10%.
These increased tariffs could lead to higher prices for groceries, automobiles, and consumer electronics.
Options traders seek market protection
U.S. companies will likely pass the higher costs due to tariffs to consumers.
An EY survey found that half of the 4,000 executives surveyed would charge consumers for two-thirds of the added costs from tariffs. With consumer spending accounting for about two-thirds of U.S. economic growth, a decline in this expenditure could significantly impact the gross domestic product (GDP). The possibility of government job cuts and higher prices may lead consumers to focus only on essential items, exacerbating economic slowdown risks.
Economic and market data also support the higher risk of recession. A closely watched model of GDP estimated a significant decline of 2.8% in annualized growth for this quarter, a sharp contrast from a 2.3% increase the previous week. Furthermore, an inverted yield curve, where short-term interest rates rise above long-term ones, also signals a potential recession.
Xu contends that while the bond market has been more sensitive to economic uncertainty than stocks over the past few months, that gap may now be starting to close. She finds that the market doesn’t seem alarmed, despite the surge in volatility on Monday. Xu shares the bond market’s economic growth concerns, including the tariff impact paired with government layoffs.
She worries it could spark a demand shock, stating, “This is happening at the same time we’re seeing large-scale reductions in the federal workforce. What does that mean in terms of consumer spending? That is going to be key to watch.”
As investors continue to seek protection against a potential market crash and recession fears rise, the Federal Reserve’s response and businesses’ ability to adapt to these challenges will be crucial in navigating the economic landscape ahead.