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