The surge in volatility means investors are acting like it's 2022 again as markets fear bad inflation news, DataTrek says

• A recent surge in stock market volatility means it looks like 2022 all over again for investors, according to DataTrek Research.
• Concerned about inflation and the trajectory of Fed interest rate hikes have re-emerged.
• Investors should consider buying stocks when the VIX surges to the range of 28 to 36, DataTrek said.

Tuesday's stock market sell-off of more than 2% sparked a surge in volatility that was reminiscent of the investor behavior seen throughout 2022, according to DataTrek Research.

The sharp decline came as bond yields surged amid concern about persistently high inflation and the likelihood that the Federal Reserve would hike interest rates more than initially expected.

"What a difference a day makes, because today the VIX closed at 22.9, its highest level since the first trading day of 2023," DataTrek Research co-founder Nicholas Colas said in a Wednesday note. The VIX continued its surge higher on Wednesday, jumping over 1% to 23.18.

The real driver behind the higher VIX is rising borrowing costs, according to the note, with Colas observing that the 2-year US Treasury yield hit a new post-pandemic high of 4.729%. Meanwhile, the 1-year US Treasury yield surged above 5%, representing its highest level since January 2007.

"We are back in 2022's market dynamic, where investors are increasingly concerned that the Federal Reserve will be taking rates higher than previously expected and inflation will linger longer than previously hoped," Colas said.

But this signals that the playbook to buy stocks that worked so well in 2022 has also returned, meaning investors should closely watch the VIX.

"Our old market rule of 'buy' when the VIX gets to 28 to 36 still applies. The former level is one standard deviation from the long run mean and the latter is two standard deviations. In 2022, when the VIX got to those levels it signaled a near term buying opportunity," Colas explained.

Meanwhile, investors are eagerly awaiting the Wednesday afternoon release of the Fed's minutes from its most recent FOMC meeting, in which they will look for clues as to the future trajectory of interest rate hikes.

Fed Presidents James Bullard and Loretta Mester both recently advocated for 50-basis-point rate hikes to tame inflation, well above market expectations for the smaller 25-basis-point rate hikes.