I’m looking for volatility’s last stand in the next few weeks.
Stock market volatility, as measured by the CBOE S&P 500 Volatility Index (VIX) just refuses to move higher. Tariff hikes? Who cares. Speculation that the President will fire the head of the Federal Reserve? What me worry? Signs that the Fed may postpone interest rate cuts? Shrug. Indications that inflation is creeping higher? Not even a raised eyebrow. A continued plunge in the dollar? Yawn.
Since the VIX spiked to 52.33 on April 8 when everyone was shocked at the size of President Donald Trump’s Liberation Day tariffs, the VIX has headed only downward. The index has barely budged above 20 on the market’s most worried days. On Friday, July 18, it dropped another 0.67% to close at 16.41, below its 10-year average of 17.45.
I find that perplexing. Unless you believe that this market is less risky than the average market over the last decade.
In the long-term I think volatility will rebound. In the short term, I think those of us with bets in the options market-in my Volatility Portfolio on my subscription JubakAM.Com site–on a rise in volatility have a roughly two week window in which near term events could spike volatility enough to make options buys, like my buy of Call Options on the VIX that expire on August 25, pay off.
If the next two weeks of so don’t see an increase in volatility, I think it’s time to cut my losses and wait for a market with a more rational–in my opinion–assessment of risk.
Why the next two weeks?
The key date is August 1. That’’s the date when President Trump has said his new schedule of higher country-by-country tariffs will go into effect.
The market is behaving as if it expects Trump to TACO again and extend the deadline. If Augst 1 arrives and the tariffs go into effect, many on Wall Street will be surprised. And we might see an increase in the VIX.
But August 1 is important for another reason. Trump has announced industry-specific tariffs to kick in alongside his country-by-country duties in two the next two weeks. Administration officials have said they might release details of Trump’s planned 50% duty on copper in the days before they’re set to take effect August 1.Copper duties are set to include all refined metal as well as semi-finished products used in power grids, data centers and the military, Bloomberg has reported.
And a tariff on copper might well be just the first of a threatened series of industry-specic tariffs. Trump said Tuesday he is likely to impose tariffs on pharmaceuticals by month’s end, and added that import taxes on semiconductors could come soon as well.
One person familiar with the process told Bloomberg that after copper, Trump’s team has discussed making announcements on lumber, chips, critical minerals and drugs in that order, though that cadence has not been finalized and may change. Those would follow existing duties on steel, aluminum, automobiles and car parts.
After investigations that can last about nine months, industry duties are imposed on national security grounds under Section 232 of the Trade Expansion Act. That’s a stronger legal footing than the emergency powers Trump used for his country levies, which face court challenges.
Here’s where tariffs on each industry stand:
Pharmaceuticals. Trump told reporters Tuesday that drug duties would come “probably at the end of the month, and we’re going to start off with a low tariff and give the pharmaceutical companies a year or so to build, and then we’re going to make it a very high tariff.” Last month, he said duties on pharmaceuticals could grow as high as 200%. Commerce Secretary Howard Lutnick said on July 8 that the phase-in period could last up to two years.
A staff draft document has focused levies on between 80 and 90 generic essential medicines, as well as specialty chemicals and precursors. Levies on generic medicines that have slim profit margins could hit companies including Teva Pharmaceutical Industries and Sandoz Group. A broader tariff that includes brand-name drugs like Ozempic and Keytruda will weigh on the largest manufacturers, such as Eli Lily, Merck, and Pfizer.
Chips tariffs are on a similar timeline to drugs and are “actually less complicated,” Trump said Tuesday. Tech companies, auto manufacturers, boat makers and cryptocurrency enthusiasts are among those who have registered complaints over potential levies, according to public comments on the probe, which started in April. The tariffs won’t just hit the chips themselves, but popular products including Apple and Samsung martphones and laptops. Tesla, General Motors, and Ford Motor have all voiced reservations.
Lumber.The administration’s lumber investigation is proceeding on a separate track from existing duties on the material from Canada, by far the U.S.’s top source of imports. The probe is expected to conclude by summer’s end.
More than a dozen lawmakers have pushed the Commerce Department to implement tariffs of at least 60% on imported wood products, such as cabinets and vanities. Some have urged the administration to tariff cabinets at 100% levels.
Republicans from Alabama, North Carolina and Pennsylvania have written letters to the administration arguing that their home-state manufacturers are threatened by cheap foreign imports.
Critical Minerals.The critical minerals investigation has proved difficult, people familiar with the process told Bloomberg. The administration has made several moves to speed domestic mineral extraction and processing in order to reduce dependence on China. But in the short term, there is little domestic industry to protect with tariffs. Only one US-based company operates a rare-earth mine and processing operation. America remains reliant on imports and tariffs could create supply crunches.
Commercial Aviation. The EU is among the economies negotiating with the administration for exemptions from possible tariffs on commercial aircraft and jet engines. The Commerce Department launched its investigation in May, which remains pending.
On Monday, the Commerce Department on Monday launched investigations into drones and polysilicon, a key material for solar panels, setting the stage for tariffs likely at a later date. The department also started an investigation into medium- and heavy-duty trucks used in shipping in April that is ongoing.
Whew! That’s a lot of tariffs. My read is that most investors haven’t factored these industry specific tariffs into their calculations of financial market risk. If some significant potion of these potential tariffs actually go into effect on or about August 1, it could trigger a rethinking of risk that would push volatility higher.
And on these possibilities I’m going to hold my Call Options on the VIX for another two weeks or so.
We’ll see.
