Rather than restraining like a seatbelt, the VIX tends to deploy on contact like an airbag and a lack of deployment under present conditions says nothing about its future potential. In fact, from today’s bargain levels and with the unknown impact of Fed rate hikes lurking, we believe VIX exposures have rarely been more attractive.

Given the historical tendency for major VIX spikes following similar turns in monetary policy, this is perhaps the most critical divergence in markets today. From currently modest VIX levels and considering the magnitude of this year’s rate adjustment, its resolution may not pass quietly.

In cycles that often take years to play out, the ebbs and flows of monetary policy give rise to business cycles that create the large VIX “loops” observed throughout its history. Were it to hold, the year’s closing high of 36.45 would represent one of the lowest bear market peaks in VIX history, suggesting that the current loop is not yet complete.

Taken together, this year’s price messages seem to be acknowledging elevated risk while also anticipating a market-friendly central bank “downshift” (slower pace of rate hikes) and eventually a “pivot” (rate cuts) as inflation recedes.

Seatbelt-style risk management offers consistent but relatively limited downside protection at substantial cost, while the airbag approach emphasizes cheaper “tail risk” defense over protection from moderate declines. While the seatbelt style often has an advantage during more measured declines like 2022, the airbag approach tends to compensate during rare but impactful crisis events such as March of 2020.