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Key Takeaways

• Between April 10 and May 12, the Cboe Volatility Index declined from above 40 to below 20 at the fastest rate on record.

• The Trump Administration's various tariff pauses have given investors confidence that tariffs will ultimately settle well below the rates proposed in early April.

• Strong first-quarter earnings have also reassured investors concerned that tariffs will drag on growth.

It’s been a year of such extremes on Wall Street that even volatility measures have been historically volatile.

The Cboe Volatility Index (VIX), otherwise known as “the fear index,” closed above 40 for the first time since 2020 in early April when President Trump sent the stock market into a tailspin with his “Liberation Day” tariffs. Then, starting on April 9, when Trump paused most of those tariffs for 90 days, the VIX began a rapid descent.

From the close on April 10 to May 12, the VIX slid from 40.72 to less than 20, the level that many consider the delineator between normal and elevated volatility. The 21-day slide was the fastest the VIX has settled back into normal territory in its history going back to 1990, according to a recent analysis from Bespoke Investment Management.

Easing trade tensions has been the primary driver of the VIX’s decline in recent weeks. U.S. and Chinese officials agreed last weekend to slash their respective tariff rates for 90 days while the two countries discuss a more lasting end to their tit-for-tat trade war. When officials announced the agreement on Monday, the VIX fell below 20 and the S&P 500 erased the last of its “Liberation Day” losses.

The VIX closed Friday at 17.24, down more than 20% from a week earlier.

Trump’s various tariff pauses “gave a lot of portfolio managers the confidence that the off ramp was there,” said David Kostin, chief U.S. equities strategist at Goldman Sachs Research.

But the "off ramp" hasn't returned tariffs to their former levels; it's put them on a new path entirely. Commerce Secretary Howard Lutnick on Sunday wrote off the possibility of lowering tariffs below 10%. The effective U.S. tariff rate is currently 17.83%, up from 2.42% at the beginning of the year and only slightly below the 22.44% rate set on “Liberation Day.”

A solid first-quarter earnings season has helped to smooth over some lingering concerns about the drag tariffs could have on economic growth. Heading into this week, the S&P 500 was on track to report earnings growth of more than 13%, well above the 7% expected at the end of March.

Plenty of uncertainty about the outlook remains. “Liberation Day” tariffs are set to resume in early July, right around the time companies begin reporting earnings for the quarter in which the bulk of tariffs took effect. That period could see a return to April's volatility if the White House can't reach agreements with the dozens of countries it has threatened with tariffs.

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