By Ketki Saxena
Investing.com -- In recent months, stock market volatility has been relatively low. However, according to Goldman Sachs (NYSE:GS), this may not be the case for much longer. The Cboe Volatility Index (VIX) spiked above 20 in March due to bank failures and is now just under 16 in line with April's calm market. But investors should not get too comfortable as a resurgent VIX could mean more difficult and expensive trades.
Goldman Sachs warns that higher volatility could lead to another nasty market tumble. While investment terrain looks good right now - with the S&P 500 largely trending upward since last October's bear market bottoming out - things could change quickly depending on the economy.
Many experts predict an imminent recession, but no bear market has ever ended without a cathartic spike. Plus, no bear run since 1950 has ended before a recession began. Investors are quietly preparing themselves for more market churn as they expect downside risk rather than upside risk.
The cost of puts (bets on stocks dipping) has surpassed that of calls (wagers on stocks rising), which means people are feeling bearish despite conviction levels being low. This scenario may be similar to what happened ten years ago during a debt-ceiling crisis when there was also an increase in VIX and a decline in the S&P 500.
While patterns are meant to be broken, events such as default on U.S Treasury bonds or partisan gridlock over raising the federal deficit ceiling can rattle things even further. As Christian Mueller-Glissmann from Goldman Sachs predicts, the U.S economy will expand at below its historical trend rate this year and keep dropping from then onwards leading to slow-motion pratfall.
So while the VIX may be on the low side right now, it's upward-sloping which means investors expect volatility to increase in the future, and further indicating that the market is starting to worry more about downside risk than upside risk.