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Fear of Stock Market Dive Creeps Back as Hedging Costs Climb

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The S&P 500 Index’s surprise 16% rally this year is rewarding traders who bought in early and punishing those who’ve remained skeptical. But fear of a downturn remains.

Investors can see it in the options market, where hedging against another rout is getting more expensive. Contracts betting on a 10% decline in the SPDR S&P 500 ETF — the largest exchange-traded fund tracking the index, better known by its ticker SPY — cost 1.8 times more than options that profit from a 10% rally, data compiled by Bloomberg show.

Stocks have wobbled of late, with the S&P posting losses in four of the past six weeks for a drop of almost 3%, amid deepening economic troubles in Europe and China. Meanwhile, the latest CPI report is expected to show that inflation posted a 3.6% annual increase in August, up from 3.2% the month before.

“There’s been hedging fatigue,” said Peter Cecchini, director of research at Axonic Capital. “Enough people were wrong about this year’s rally that they got tired of spending money to protect against future losses. But we don’t know how much longer the AI narrative will be able to carry stocks broadly higher.”

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