What Happens When the VIX Collapses? An In-Depth Review of a 60% Drop in the Fear Index and Its Impact on the S&P 500

In the global capital markets, the VIX (Volatility Index) is considered one of the key barometers for understanding investor sentiment and the psychological state of Wall Street. The index, reflecting expected volatility via S&P 500 option prices, is viewed as the market’s “fear gauge” or thermometer for uncertainty. One of the most intriguing phenomena occurs when the VIX plunges by dozens of percentage points in a short period—a rare scenario that offers a glimpse into how the market behaves during moments of extreme change.

A 60% Drop in the Fear Index – A Rare Event

According to historical data, it is rare to see a drop of over 60% in the VIX over a nine-week period. The latest and most prominent example occurred on June 6, 2025, when the index fell from 45.31 to 16.77—a staggering 63% drop. Such a move typically follows periods of economic shock, recession fears, or significant geopolitical events, after which investors gradually return to optimism.

Analyzing Returns After a VIX Crash

A review of the twenty largest nine-week VIX declines reveals an interesting picture. On average, the S&P 500 returned 5.4% in the six months following a sharp VIX drop, with one-year returns climbing to 15.8%. Over longer periods—two, three, and five years—the average returns were 28.5%, 44.3%, and 95.6% respectively.

In comparison, during all other periods without such sharp VIX drops, the averages were 5.8% over six months, 12.1% over one year, and 74% over five years. In other words, periods of dramatic VIX declines did not substantially change the likelihood of profit and, in some cases, even improved long-term returns.

When Doesn’t a VIX Crash Lead to Gains?

Despite the impressive averages, there were also exceptional periods where a sharp drop in the fear index did not lead to stock market gains—sometimes the opposite occurred. A prominent example is the 2008 crisis: after a significant VIX drop in May 2008, the S&P 500 posted negative returns over the following six months, year, and even two years, due to the global financial crisis. However, in most cases reviewed, a VIX plunge signaled a wave of optimism that resulted in strong market rallies.

The Importance of Risk Management

A sharp drop in the VIX may signal the end of a stormy period, but it does not guarantee total stability. For investors, this is an opportunity to re-examine their portfolio, ensure diversification, and assess whether market sentiment matches economic reality. Sometimes, new regulation, changes in central bank policy, or external events can trigger a swift correction even after a VIX crash.

The Role of Regulation and Financial Institutions

The drop in volatility can also result from regulatory changes, central bank interventions, or government policy aimed at stabilizing the markets. For example, bond-buying programs, interest rate cuts, or the announcement of aid packages—all these can restore confidence, lower the VIX, and fuel stock market rallies.

Practical Advice for Investors

Even when markets are calm, it is important not to chase after emotion or become overly optimistic, which can lead to underestimating risk. Maintaining a diversified portfolio is essential—don’t be tempted by a one-sided move. Continue to monitor macro trends, yield indicators, and global events that may change the market outlook.

Conclusion: The Fear Index is a Barometer—Not a Crystal Ball

Sharp declines in the VIX are an important sign of market sentiment but do not guarantee uniform outcomes. History shows that in most cases, a calm market after a storm is a gateway to gains, but it is always important to remember the risks, especially during extreme events. Investors should combine VIX analysis with macro trends, market pricing, and their own risk appetite.