After a prolonged period of tranquility, the market is starting to feel uneasy about what's to come.

Last week, the CBOE Volatility Index (VIX), a widely watched gauge of stock market sentiment, soared to 21—a threshold not seen since the regional banking crisis that shook the stock market in March.

This surge in market volatility coincides with a host of concerns, including mounting geopolitical tensions in the Middle East, lingering fears of an impending recession, uncertainty surrounding leadership in Washington, record-high bond yields, and resilient oil prices.

If that’s not enough, a growing chorus of Wall Street bears predict a significant year-end sell-off in stocks.

These factors, on their own, have the potential to exert significant pressure on the markets, but when taken together, they have disrupted what had previously been a robust rally throughout 2023.

According to Stifel chief equity strategist Barry Bannister, the recent "no recession relief rally" has come to a close.

In a recent note, he noted that there remains a risk of recession in the first quarter of 2024.

"The lagged effect of past policy tightening, persistent Fed vigilance... the risk of a moderate oil shock and movement closer to full resource utilization in the economy raise the risk of a classical, albeit mild U.S. recession in early 2024," said Bannister.

Defensive investor stance

The recent surge in market volatility, as reflected by the VIX, has prompted investors to adopt a more defensive stance. That probably explains some of the stock market's recent weakness.

“As investors navigate VIX and bond yields, a defensive tilt is essential," said Julian Emanuel, senior managing director at Evercore ISI.

Emanuel set a critical threshold for the VIX at 21. Below this threshold, the index's movements may be influenced by “micro” factors such as AI and corporate earnings results.

However, once the VIX surpasses this level, macro-level factors tend to take control of the market, heightening overall uncertainty.

"Geopolitical risk, including concerns related to Ukraine, Russia, and China, is currently at its highest since the fall of the Berlin Wall in 1989, with the exception of the post-9/11 period," Emanuel emphasized.

Market resilience amid uncertainty

Despite these formidable headwinds, Keith Lerner, co-chief investment officer at Truist, says the recent market narrative is more about a pause in the ongoing stock rally than an outright market sell-off.

While the S&P 500—America's key stock benchmark—has retreated roughly 3.7% since the Fed hinted at higher interest rates about a month ago, the stock market has demonstrated remarkable resilience.

Recent market behavior suggests that a return to a more stable VIX is contingent on gaining clarity regarding the Fed's timeline for ending interest rate hikes.

Such clarity would take at least one concern off investors' shoulders. Unfortunately, the exact timing of when this picture will become clear remains uncertain.