As I worked on our monthly Flash Report for clients last week, I couldn't help but notice the following: In January, expected stock market volatility plummeted to an all-time low of 12 on the Volatility Index, or VIX. The VIX is down 40% year over year and 30% six months ago. How is this possible, given the market's high level of uncertainty?
One reason for the low volatility is that: while the S&P 500 has been rising since the election, this is not a tide that is lifting all boats. Certain sectors, such as financials and industrials, have performed exceptionally well, while others have underperformed. Due to the fact that the VIX Volatility Index is calculated on the S&P 500 Index as a whole rather than on the 500 individual stocks, the VIX does not reflect stock price divergence.
What was the actual annualized volatility of the stock market in January? Additionally, it is low. It was just 6.5 percent when standard deviation was taken into account. Bloomberg reports that this is only the seventh occasion since 1928 that a year has started thus peacefully. Again, as equities move in diverse ways, the aggregate result may be less volatility, not increased volatility.
Is the VIX Index a good proxy for market risk? No, but that is not the intention. The VIX is one of a few widely used indicators of investor emotion, and it frequently does not tell the entire story.
The January 2017 result for the VIX was 12. What this means is that investors are expecting up and down moves in the S&P 500 to be within the 12% range about 67% of the time (one standard deviation). This level of anticipated volatility is quite low. The historical average for the VIX is around 20.
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