Volatility is Low, Historically This has Been a Positive

Thursday, December 14, 2017 |

As the stock market continues to reach new highs investors have begun to worry about a lack of volatility; The above chart indicates we are experiencing an extended period of historically low volatility. 

However, are these fears misplaced?  The graph below shows the average 1, 3, 6, 9 and 12 month returns following low volatility bull runs. As we can see, the 10 periods displaying such characteristics were on average followed by a brief decrease in equity prices that transitioned into a linear increase.

Additionally, 30 day realized volatility has never eclipsed 20% trailing a VIX reading of <12%. A simple way of saying this: if estimated volatility (as measured by VIX) is low, there is a low probability of realized volatility spiking during that time frame. At the time of writing the VIX measures 9.89%.

In light of these factors, it may be helpful to consider the following: 

  1. Expected equity market volatility falls in the 12 – 25%+ range 98 percent of the time, so current levels are rare but not unheard of.
  2. During the ‘.com bubble’ realized volatility and the VIX maxed out at 42% and 44% respectively, a year and a half before the market crashed.^
  3. In 2008 the VIX touched above 30% 2 months before the S&P 500 peaked, and a full year prior to the global financial crises ensuing. ^
  4. Current volatility metrics and historic trends can give investors some pause, but amid an expensive stock market and geopolitical uncertainty, mindfulness is required.

This post was written by Adam Nickels, Junior Portfolio Analyst

Title Chart Source: Bespoke.
Low Volatility Rallies Chart Source: Capital Advisors, Ltd.

^ Brown, Aaron. "What History Says About Low Volatility." Bloomberg.com. Bloomberg, 03 July 2017. Web. 21 Nov. 2017.

S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market.

Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.

VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking, is calculated from both calls and puts, and is a widely used measure of market risk, often referred to as the "investor fear gauge."

Past performance is no guarantee of future results. Investors cannot invest directly in an index.