Before the Rose Garden: How Markets Are Really Reacting

Markets are jittery, but is anyone actually panicking? Kevin Davitt breaks down what’s real, what’s priced in, and why the VIX-VXN flip might be the sneakiest signal yet—just hours before the Rose Garden fireworks.

Andrew Wilkinson 

Welcome to this midweek look at markets. Let’s get straight into it. My guest is Kevin Davitt, Head of Index Options at Nasdaq. Welcome, Kevin. 

Kevin Davitt 

Andrew, how are you? Thank you for having me. 

Andrew Wilkinson 

Doing all right. It is Liberation Day, for the sake of posterity following the release of this episode, and after the closing bell today, Kevin, we’re expecting President Trump to make his Rose Garden announcements. In a kind of bigger scheme of things, I want you to frame it for us. How have investors behaved in the run-up to this pending speech? 

Kevin Davitt 

Yeah, so I’m very much gonna focus on the bigger picture, as you mentioned, and that allows me to paint with kind of broad brush strokes. As you mentioned, my work tends to focus on equity index performance, and typically through the lens of options. 

So with that in mind, I’d have to describe investor behavior in Q1 of this year as fairly typical. So, on average—quarter’s in the books—Nasdaq 100 has moved with slightly greater volatility thus far this year when compared to last year. Just a couple numbers around that: average close-over-close moves in the Nasdaq 100 are right around 1.1%. 

Now, that compares to just less than 90 basis points on average last year. So call it up 30%. Average intraday ranges—so high to lows—increased from about 1.25% to 1.7%. Again, roughly 30% higher. 

That’s a bunch of numbers, which I think tend to be quickly forgotten. The distilled version is that markets are moving a bit more on an intraday and on a daily basis when compared to last year. 

I don’t think that the overall behavior stands out as highly unusual, despite some of the protectionist rhetoric. So what we’ve talked about is realized vol—it’s up slightly relative to the past two years for both the Nasdaq 100 and the S&Ps, but it remains well below realized vol levels from 2022, which is still, I think, fresh in the mind for some market participants. 

And then more specific to my wheelhouse—I think the broader trend of investors embracing optionality, and specifically index options, continues. So, as your audience and you guys likely know, volumes across the industry continue to ramp higher. The quarterly average was 58 million per day, so that’s up about 20% compared to last year, which is a record. 

If we look just at Nasdaq 100 index options, we just finished our 11th consecutive quarter with ADV—average daily volume—growth. Record-setting. We’re excited about that. We could carve it up a bunch of different ways, but I don’t think that matters. We’re talking about the big story. 

The big macroeconomic story continues to center around technology and consumer discretionary—the names that largely power the Nasdaq 100. And I don’t think it’s surprising to see more of the market seek out risk management tools that kind of directly reference those pockets of the market. 

My last point here—and it’s something that I brought up on a webinar with you a week or so ago, Andrew—investors never really panicked in Q1. I think there were periods of what we considered episodic vol, but even with all the headlines, there were no days that really felt like a washout or a capitulation. And I’m not sure if that’s a good thing or cause for concern. 

As we look forward, panic in my mind tends to occur alongside job losses, and thus far, the labor market in the U.S. has been resilient. 

So, real big picture: broad market valuations have been trimmed, and maybe in hindsight, that’s gonna be viewed as a healthy correction. But like all things, time is gonna tell. 

Andrew Wilkinson 

We don’t know what to expect—what might change in the Rose Garden Wednesday afternoon from President Trump. We just know it’s gonna be huge. It’ll be the biggest thing ever. There’ll never have been anything so big. 

The stock market has just reached a low point for the year. How do you think investors might respond, given that tariff expectations are potentially fully baked in? 

Kevin Davitt 

So, let’s walk that back. I know you were being tongue-in-cheek with the “biggest event ever.” 

Your guess is as good as mine, honestly. And I’m gonna just reframe that question slightly, because I have no idea what’s gonna transpire with the tariffs. 

So, big picture—let’s think about maybe a best-case scenario for the markets Q2 going forward, and then maybe a worst-case scenario. This again is just my personal perspective, independent of the role at Nasdaq, just like yours is. 

What I believe is that we ought to pay attention to what becomes law as opposed to what’s spoken about on the evening news. 

In the positive outcome camp, maybe proverbially the bark is worse than the bite. Maybe there’s a measured approach, and maybe we get some of the focus on pro-growth policies that I think many expected when the markets were rallying into year-end. In that situation, I think you could see markets breathe a sigh of relief and maybe leave room for a rally. 

In our previous webinar, I likened the environment a bit to 2018, which—for those that don’t remember—there was some early year volatility. Generally, things trended higher mid to late year, and then a December selloff. With, over the calendar year, roughly an unchanged year. I could see a scenario like that. 

Let’s say there’s full-blown protectionism in kind of word and deed. I think we could see a more meaningful reshuffling of the deck in the markets. The interconnected nature of global trade has been decades in the making, and that can’t realistically be undone rapidly. 

We haven’t seen real aggressive tariffs—and I’m not an econ type—but in about a century, with the exception of a real brief period in World War II. So there’s no real playbook for that. 

I think that costs get borne somewhere. And that is—again, I’m not trying to sell the fear—but that’s a scary scenario whereby stagflation could become a genuine talking point again, where inflation is picking up and growth slows, and then the Fed could arguably be cornered. 

I think the other potential analogy was more like 2022. As investors know, that was not a fun year across the board for assets. 

Andrew Wilkinson 

Kevin, your ballet work is really volatility amidst index options trading in and around technology stocks and the Nasdaq in general. You and I recently chatted, as you mentioned, about the calm nature of the decline in stock indices in the first quarter. 

What does capitulation look like from your seat? 

 
Kevin Davitt 

So we’re coming back to it now. No escaping it. 

I can’t help but be reminded of an old Supreme Court justice quote—I think it was Potter Stewart—that essentially said, “I know it when I see it.” 

And I also can’t help but think that maybe capitulation is just another one of those terms that we’re able to use in hindsight. 

Kevin Davitt 

General definition—I would say that capitulation involves a day or a group of days with some really outsized moves. We’re talking about two-, three-standard-deviation days. I would harken back to mid-March of 2020 for a somewhat recent example. You had three consecutive days with 10% up or down moves in the Nasdaq 100 in a row. 

That is something closer to capitulation. There tends to be a “baby-out-with-the-bathwater” mentality—investors really clamoring for safety, typically in the form of hard assets. Think: gold. To a certain extent, we’ve seen that a bit with the moves in gold and silver in Q1. 

We’ve not seen—year to date—a huge jump in bonds with a corresponding decline in rates. Overall, I think the trend has been toward more defensive sectors: things like consumer staples, low-vol names, and the like, and broadly value over growth. 

One last point—and the way you teed this up about thinking through the lens of index volatility—there have been historically unusual situations where the relationship between [volatility indexes] becomes very narrow or it inverts. 

So let me be a bit more specific there. VXN—as you know, but probably some of the audience doesn’t—is a forward volatility measure where the inputs are Nasdaq 100 index options. VIX is a forward vol measure where S&P 500 options are the input. And generally speaking, VXN tends to measure somewhere between a two and seven vol premium to VIX. It tends to be higher. 

That relationship will ebb and flow. Something we’ve talked about very infrequently: that spread becomes super narrow or VIX measures at a premium to VXN. Those are situations that, in my mind, could signal some degree of capitulation. 

I’m gonna give you and the audience a couple of points historically where that happened. Looking back about five years: 

March 13th, 2020 

June 11th, 2020 

November 26th, 2021 

August 5th, 2024 

Now, more recently, it got very narrow on March 10th of this year, when that sort of original tariff plan was rolled out and the markets got hammered over that previous weekend. It was Canada and Mexico—our two biggest trading partners. 

My point here is: that relationship is something I believe is worth paying attention to, particularly if you trade index options. 

Andrew Wilkinson 

Buckle up, Kevin Davitt. We’re looking forward to speaking to you again following today’s Rose Garden events in future Market Minute podcasts. Kevin Davitt is Head of Index Options at the Nasdaq. Thanks for joining me. 

 
Kevin Davitt 

Thank you very much for having me. I look forward to it as well. 

 
Andrew Wilkinson 

And to the audience—don’t forget to subscribe wherever you download your podcast from. 

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