Market Fear and Future Returns

April 8^th 2025

Christopher Mallon

While Tariff news continues to jolt markets up and down, it’s a good time to review how markets have historically performed in the years following similar spikes in volatility.

To explore this, we’ve analyzed periods of elevated market fear by examining CBOE VIX levels and the subsequent returns of US Large Cap Stocks.

Quick Refresher on the VIX:

The VIX measures expected volatility in US Large Cap stocks over the next 30 days. This will serve as our Fear Gauge.
The average level for the VIX is approximately 19.5
One Standard Deviation is approximately 7.8, meaning that levels above 27 indicate an abnormally high level of fear¹

What Happens after Fear Spikes?

I’ve constructed the following chart looking at the highest weekly VIX levels going back to January of 1990:

Source: Ycharts

Takeaways:

Historically, when the VIX has reached these elevated levels, the market has produced positive 1-year and longer-term returns 100% of the time.
Average forward returns following high VIX weeks see chart:
- 1 year: 39%
- 2 years: 60%
- 3 years: 63%
- 4 years: 95%
- 5 years 141%
As you can see from the dates on the chart, these volatility spikes coincide with the Great Financial Crisis of 2008-2009, and the COVID Lockdowns of 2020.

Where do we go from here?

Again, using history as a guide, let’s isolate what helped calm the markets during the Great Financial Crisis and the COVID Lockdowns:

Great Financial Crisis (2008–2009):

Monetary Policy Actions: The Federal Reserve cut the federal funds rate from 4.5% to a range of 0–0.25% by the end of 2008. It also launched emergency liquidity programs to support key financial institutions and restore confidence.²
Fiscal Policy Measures: Congress passed the Emergency Economic Stabilization Act in October 2008, which created the $700 billion TARP program to purchase toxic assets and inject capital into banks.³

COVID-19 Pandemic (2020):

Monetary Policy Actions: The Fed quickly slashed interest rates to near zero and implemented massive quantitative easing, buying large quantities of government and mortgage-backed securities.⁴
Fiscal Policy Measures: The U.S. government passed several stimulus packages, including the $2 trillion CARES Act in March 2020, which provided direct payments, enhanced unemployment benefits, and support for businesses.⁵

Takeaway:

In both cases it was a strong shift in Monetary and Fiscal policy that calmed markets.

Final Thoughts

If government policy (tariffs) is the source of today’s uncertainty and volatility, then history suggests that a meaningful policy shift could be the key to restoring market confidence.

Questions or comments? Reach me at chris@pcmadvisors.com

Footnotes

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