Financial Market Volatility in the Spring of 2025

The change of U.S. presidential administrations often creates uncertainty about economic policy, and such news causes uncertain market participants to revise their expectations, which changes asset prices. When the party of the incoming president changes, as happened in 2025, financial markets exhibit an unusual amount of uncertainty and volatility.

Financial markets broadly expected deregulation, tax cuts and tariffs from the administration of President Donald Trump.For evidence of these expectations, see J.P. Morgan’s report from November 2024 and Citigroup’s report from January 2025. Market expectations are never perfect, however, and the move toward tariffs in February through April 2025 was more aggressive than expected. As a result, fears of trade wars and possible recession waxed and waned. The introduction of trade restrictions was not the only event to perturb markets. For example, India and Pakistan fought a minor war over a serious terrorist incident in India. Nevertheless, changing expectations of tariffs and business conditions contributed substantially to financial market volatility in the first four months of 2025.

Comparing January-to-April Volatility with Historical Levels

We can quantify this spring’s volatility in three major measures—the S&P 500, the VIX and the 10-year Treasury yield—and compare that volatility to historical measures. The S&P 500 is a widely followed stock index, comprising the 500 largest publicly traded firms in the United States, while the 10-year Treasury is a benchmark measure of the cost of long-term borrowing by the U.S. government. The VIX is a measure of forward-looking one-month price volatility of the S&P 500, so it is a useful gauge of uncertainty.The prices of options can be used to measure expected volatility in the price of the underlying asset because option prices rise and fall with expected market volatility. These measures of volatility implied by options prices are known as “implied volatility.” Just as one can buy shares of stocks or commodities on futures markets, one can buy a futures contract for a volatility index, called the VIX, on S&P 500 volatility on the CBOE Futures Exchange. The price of the VIX contract rises or falls with the expected 30-day volatility of the stock index.

The figure shows that the 10-year Treasury yield and S&P 500 index moved together over 2025. These series don’t always move together, but they probably did in the first four months of 2025 because expectations of growth/recession were the dominant factors in price changes. The vertical red line in the figure shows April 2, 2025, the date of an important tariff announcement.

There are many ways to measure volatility. In this blog post, I focus on the size of one- to five-day “unwelcome” movements—that is, movements that could indicate financial markets perceive problems in economic policy. Unwelcome movements are negatively signed for the S&P 500 but positively signed for the VIX and the 10-year Treasury yield.This post’s definition of “unwelcome” movements is subjective. While it is probably not controversial to assume that declining stock prices or rising uncertainty are unwelcome to most market participants, Treasury yields can rise because of perceptions of greater fiscal risk (bad) or because of perceptions of stronger growth.

The top panel of the table below shows the three largest movements for the VIX, S&P 500 and 10-year Treasury yields since January 1990, while the bottom panel shows the three largest such movements from Jan. 2, 2025, to May 27, 2025.

The dates for the largest historical changes in the top panel reveal that most periods of greatest historical volatility were during the Great Financial Crisis in 2008 or the beginning of the COVID-19 pandemic in 2020. Other than those incidents, some large yield increases occurred in October 1998, during the bond market recovery from the Russian default a couple months earlier. Similarly, there was a large increase in the VIX in August 2015, as the VIX recovered from unusually low levels.

There are no obvious single factors for the large, 2025 movements shown in the bottom panel, although all three series show their largest unwelcome movements around April 2, when President Trump announced broad tariffs and other countries announced retaliation. These three 2025 movements were all very large, in the 99th percentile of historical changes since 1990. Fortunately, this extreme volatility receded by late April—stock and bond prices recovered as markets appeared to conclude that a major trade war was unlikely.

Notes

1. For evidence of these expectations, see J.P. Morgan’s report from November 2024 and Citigroup’s report from January 2025.
2. The prices of options can be used to measure expected volatility in the price of the underlying asset because option prices rise and fall with expected market volatility. These measures of volatility implied by options prices are known as “implied volatility.” Just as one can buy shares of stocks or commodities on futures markets, one can buy a futures contract for a volatility index, called the VIX, on S&P 500 volatility on the CBOE Futures Exchange. The price of the VIX contract rises or falls with the expected 30-day volatility of the stock index.
3. This post’s definition of “unwelcome” movements is subjective. While it is probably not controversial to assume that declining stock prices or rising uncertainty are unwelcome to most market participants, Treasury yields can rise because of perceptions of greater fiscal risk (bad) or because of perceptions of stronger growth.