Market volatility is back with a vengeance. The CBOE Volatility Index (VIX), aka “fear index,” has spiked in recent days. Sure, options traders love volatility, but it causes agita for average individual investors.

As of this writing on Tuesday, the VIX had risen to about 19. When the VIX surpasses 20, you can expect greater than normal volatility over the next 30 days, and vice versa. Below, I look at what’s driving volatility and I suggest a few ways to cope.

First the good news: According to research firm FactSet, financial analysts in aggregate predict the S&P 500 will rack up a price increase of 19% over the next 12 months.

At the sector level, information technology (+22.8%), consumer discretionary (+22.7%), and real estate (+22.6%) are projected to post the largest price increases.

But in the interim, investors will have to buckle-up and withstand considerable volatility, with selloffs long the way.

U.S. Treasury yields have continued to rise, with the benchmark 10-year yield hitting 4.55% on Monday, its highest level of the year. The yield’s breach of 4.50%, the multiyear resistance point, is bearish for stocks (see chart).

It’s axiomatic that as yields rise, stocks fall. The recent surge in yields has been largely driven by last week’s hawkish pronouncements by Federal Reserve Chair Jerome Powell.

The Fed’s updated “dot plot” also soured Wall Street’s mood. The median dot for 2023 remained at 5.6%, which suggests that one more rate hike is in the cards, while the rest of the dots for 2024 to 2026 all shifted higher.

The reality of “higher for longer” is weighing on both stocks and bonds, with growth sectors such as technology lagging overall.

What’s more, the bloom is off the rose for artificial intelligence (AI) stocks, at least for now, as investors conclude that AI has gotten overbought.

Which is not to say that AI isn’t a genuine megatrend. Case in point: Amazon (NSDQ: AMZN) announced this week that it will invest at least $4 billion in tech startup Anthropic, a San Francisco-based company that researches and develops AI systems.

Amazon will obtain partial ownership of Anthropic and access to the company’s AI tools. Amazon seeks to AI-enhance its cloud computing platform, Amazon Web Services (AWS).

The main U.S. stock market indices closed higher Monday, amid a burst of optimism fueled by the Amazon deal and improving guidance for overall S&P 500 earnings in the third quarter.

However, the main U.S. stock market indices closed sharply lower Tuesday, as follows:

• DJIA: -1.14%
• S&P 500: -1.47%
• NASDAQ: -1.57%
• Russell 2000: -1.27%

The VIX jumped more than 13% to close at around 19, as anxieties grow over climbing yields, policy at the Fed, and political dysfunction in Congress. The VIX now hovers at its highest level since May 25. Treasury yields hit new 16-year highs. China’s continuing economic woes and rate worries sent Asian and European equities lower as well.

Tuesday was the worst day for the Dow Jones Industrial Average since March; the S&P 500 posted its fifth down day in six. September is living up to its reputation as a dismal month for stocks.

The Washington Follies…

The new fiscal year for the federal government starts on October 1. As of this writing, there is no agreement in place to enact the 12 annual appropriation bills. If a deal isn’t reached by the deadline of September 30, federal agencies will be forced to cease all nonessential functions.

Typically, in the past, the brinkmanship in Congress has given way to a last-minute budget deal, but this time around, a cohort of burn-it-all-down nihilists in the U.S. House are hellbent on shutting down the government.

WATCH THIS VIDEO: Assessing The Latest Risks to The Rally

We’ve been down this budgetary road before. The most instructive case study is in the summer of 2011. Back then, as now, we had a divided Congress and a Democratic president. The budget crisis prompted Standard & Poor’s to downgrade the U.S. government’s credit rating for the first time in history.

During the period from when the U.S. Treasury initiated extraordinary funding measures until the deadline on August 2, 2011, the S&P 500 plunged about 6%. The House passed a debt-ceiling compromise a day before the deadline, the Senate approved it, and President Obama signed it on August 2. However, in this week’s movie sequel, it’s unlikely that the cavalry will save us in the final reel.

Until this latest political risk has passed, stay defensive. Raise cash levels and hunker down, at least for the short term.

In the meantime, for a steady source of high income amid these crazy times, consider the advice of my colleague, Jim Pearce.

Jim Pearce is the chief investment strategist of our flagship publication, Personal Finance. Jim has unearthed a once “secret” income power play that’s giving everyday investors the opportunity to collect huge payouts, regardless of Fed policy or the gyrations of the VIX. To claim your share, click here.

John Persinos is the editorial director of Investing Daily.

To subscribe to John’s video channel, click this icon: