Exit greed, enter fear.
The tech-heavy Nasdaq 100 index closed the day down 2.13 percent, and the broader Standard & Poor’s 500-stock index fell by 1.45 percent as investors sold out of such high-flying stocks as Amazon, Facebook and Netflix. It was the sharpest daily decline in the benchmark S.&P. 500 since May 17.
Gold held at $ 1,283.70 an ounce after its strong run of late, and the Nikkei 225 index in Japan steadied from its fall on Wednesday, closing at 19,730. The relative safety of United States Treasury securities continued to appeal, with the yield on the 10-year note falling to 2.20 percent from 2.25 percent on Wednesday. (Yields and prices move in opposite directions from each other.)
At the root of investors’ nervousness was a jump in the VIX, the Chicago Board Options Exchange Volatility Index. Known as Wall Street’s fear gauge, the index measures investor expectations that stocks will experience sharp moves in the future.
On Thursday, the VIX surged 44 percent from its historically low levels to close the day at 16.04, its highest close since Election Day in November.
For many weeks this year, the VIX hovered persistently in single-digit territory, unusual for a barometer that historically trades around 20.
The index’s long period of placidity amid constant upheaval in Washington has posed a persistent riddle for Wall Street prognosticators.
Some analysts warned that expectations of low volatility had lured a rush of recent investment, particularly from retail investors piling into exchange traded funds tied to the S.&P. 500, the Nasdaq and other indexes and strategies.
A sharp upward trend in the VIX could well prompt many of those newcomers to flee at the same time, which could turn a market downturn into something more severe.
The potential risks extend beyond those who are new to the party. In recent years, hundreds of billions of dollars have flowed into risk parity and other machine-driven funds that are programmed to start selling stocks and bonds once volatility rises sharply.
In a period of investment calm and artificially low interest rates, automated funds, which churn out consistent if unspectacular returns, have become very popular among yield-hungry investors.
“By definition, investors tend to be long the most risk when volatility is at its lowest levels,” said Julian Brigden of Macro Intelligence 2 Partners, an independent research company based in Vail, Colo., that advises large money management firms on global investments. “So the question is: How much more volatility do we need to see before funds start to disgorge assets mechanically?”
After many years in which investors made a mint by betting against the VIX, a number of investors have begun to argue that the time has come to wager on the VIX — not against it.
Jeffrey Gundlach, a well-known bond investor at DoubleLine, predicted that his company would see large returns on a “bull call on volatility.”
Supporting that contention, one of the best performing investments on Thursday was an exchange traded vehicle that tracks the VIX — the iPath S.&P. 500 VIX, which soared 17.9 percent, according to the data gathering firm Y Charts.
Of course, it may be too early to predict the end of one of the longest bull markets in financial history. The global economy continues to grow, and companies in the United States remain highly profitable, with earnings and sales in the quarter that ended in June handily beating expectations.
The VIX’s sharp move could also simply be a reversion to its mean and not a sign of panic in the markets.
Analysts noted that a long period of stock market calm is highly unusual and that a correction should not come as a shock.
Charlie Bilello, an analyst with Pension Partners, a financial advisory firm, said that before today’s sell-off, the S.&P. 500 had experienced only two down days of more than 1 percent this year; the last similarly long period of financial calm was in 1964.
What remained to be seen was whether investors, as they have done in the past, would buy the dip, snapping up financial assets in the wake of a minor downturn.
That reserve of buying power, be it retail or institutional, has cushioned stock market drops in the past, and optimists are hoping that it will do so again.