Volatility: Out of Bounds

Written by: | October 27, 2017

Source: Bloomberg, 9/30/17. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment

THE BOTTOM LINE

  • The U.S. stock market has moved from one record to the next this year, with the S&P 500 Index reaching an all-time high of 2577.36 on October 23, nearly 17% above1 its end-of-2016 level.
  • At the same time, the widely-watched CBOE VIX Index, the so-called “fear index”. has fallen to historic lows, reaching 9.19 on October 5.
  • But despite the glut of good news, many stock-watchers feel nervous. That’s especially true for contrarians, who fear that prices – as well as volatility – are both too good to last.
  • The reason: not only is volatility low in absolute terms, it’s also well below the normal range for the history of the index since it started trading in January 1990 – normal in the statistical sense, as indicated by standard deviation, a measure of how unusual a particular number is relative to a historical average.
  • For the VIX, one standard deviation below its historic range is 11.36, and one standard deviation above comes out to 17.16.
  • With the VIX trading at 11.242 , it’s just outside the bounds of normal.
  • Experience has shown that the VIX can take on some extreme values with very little notice, as markets react to geopolitical shifts or unexpected economic news.
  • All of which suggests that investors concerned about the lack of volatility now are right to see this as something unusual – and may want to take advantage of the relative quiet to take a serious look at how to soften the blow of sudden moves in volatility, in specialized low-vol strategies built for just these types or reversion.

1 S&P 500 total return, 12/30/2016 – market open, 10/23/2017

2  As of 1:15 PM ET  on Thursday October 26

Note: Dividends represent past performance and there is no guarantee they will continue to be paid

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