Volatility continues its downward trend which has been great news for stocks. In fact, the VIX – also known as the ‘Fear Index’ – is setting record monthly lows in 2017 – just as the market is setting all-time highs. The question for investors is ‘how low can volatility go?’ The bar below shows the average monthly values for the VIX (averaging the closing daily values) broken down by decile since 1990. The average monthly value for the VIX over this period is just under 20 (19.5). The red arrow indicates where we stood at the end of August 2017 – roughly the 93rd percentile. In fact, dating back to 1990, there are only 5 months with average monthly readings of less than 11.0 and three of them are from 2017 (February, June and July). The other two occurred at the end of 2006. A concern for investors should be that volatility is mean-reverting and the returns on stocks (and many other risk assets) are historically negatively correlated to volatility in the market. While the state of the global economy looks positive, markets looks pricey and investors have been quick to shake-off any bad news, particularly on the geopolitical front. From that perspective, it’s easy to confuse confidence with complacency. But, investors have always shown their ability to take things to extremes and we seem to be nearing that point again. For those who have been long volatility, the odds are good that you’ll eventually be proven right but, I’m also reminded of a quote attributed to John Maynard Keynes that “the market can remain irrational longer than you can remain solvent”.
© Van Etten Consulting and vanettenconsulting.com, 2016. Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Keith Van Etten and vanettenconsulting.com with appropriate and specific direction to the original content.
The views expressed in this material are the views of the author through the date of publication and are subject to change without notice at any time based upon market and other factors. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. This information may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those discussed. There is no guarantee that investment objectives will be achieved or that any particular investment will be profitable. Past performance does not guarantee future results. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance.