Don't fear the VIX. Volatility is here to stay for now, and that's no bad thing.
- The Cboe
Volatility Index— or VIX, which is commonly referred to as the stock market's fear gauge — is trading at fairly elevated levels and suggests more volatilityfor months to come, regardless of the outcome of the November election.
- The index can take months, or even years, to return to more average levels following a crisis, according to DataTrek data going back 30 years.
- Goldman Sachs says volatility is on average 25% higher in October, but there is no evidence that this trend is exacerbated in election years.
Higher volatility looks like it will last well into next year, regardless of the outcome of the November presidential election — or even the arrival of an effective vaccine against COVID-19. That's according to 30 years of data suggesting that volatility takes months, or even years, to subside after a crisis.
In spite of a degree of optimism over the outlook for corporate profits and an improving economic backdrop, the VIX is holding around 26.6, well above where it was at this point last year, at 14.91. It's also well above the 15.8 average seen over the last five years, although it is down from mid-March's peak above 85.0.Read more: Wondering whether to go long on growth or value stocks? JPMorgan's take on EPS estimates could help answer the question.
Analysts at DataTrek draw a comparison with the behavior of the VIX towards the end of the 2008-2009 financial crisis, when the index traded at an average level of 24.9. The average for the final quarter of that year was 23.1, compared with an average of 28.84 so far in September this year, based on exchange data."The VIX remains elevated long after the depths of a crisis, as we can see with September 2009's mean reading of 24.9 or Q4 2009's 23.1," DataTrek co-founder Nicolas Colas said in a note this week. "Don't, in other words, expect to see 2020's VIX drop below the long run mean of 19.4 any time soon." A reading below 20.0 in the VIX suggests investors perceive market risk to be low, while a reading above 30.0 indicates more acute nervousness.
Volatility tends to trade in cycles, just like any other asset class. It has periods when it "runs hot" — such as those during 1997-2003 and 2007-2012, as well as periods when it "seems to go to sleep", Colas said.
"We need to remember that the long run history of the VIX is really a tale of 2 sorts of
Aside from its "hot-cold" cycles, at the moment, VIX derivatives are suggesting heightened anxiety, not just around the November 3 election, which many believe may not yield conclusive results immediately, but also around the weeks following the vote.
October's track record as a high-volatility month has been even more marked by sharp price swings dating back to 1997, during the Asian financial crisis. Goldman noted that it also occurred in 2002, as the markets were recovering from the bursting of the dot-com bubble, and in 2008, when US investment bank Lehman Brothers collapsed as part of the subprime lending crisis.DataTrek's Colas said political uncertainty is a far smaller factor for current volatility in the US stock market.
"The (6%) difference between today's VIX … and September 2009's average of 24.9 is a reasonable way of thinking about how much 2020's political uncertainty is affecting US equity volatility. It is measurable, but not as large as one might think," he said.Read more: Legendary trader Randy McKay turned $2,000 into $70,000 in just 7 months. Here are the 7 trading rules that contributed to his multi-year run of million dollar-plus returns.
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