Russ discusses what’s behind the unusually low volatility in the markets, and what could bring an end to the days of calm.
The reality of writing a regular blog is that sooner or later you’ll repeat yourself. For the umpteenth time in recent memory, volatility has slouched to a level that should set off at least a few alarm bells. Markets have been eerily calm of late, with the VIX Index, a commonly used measure of U.S. equity volatility, currently in the low teens.
Volatility is not just low in an absolute sense. More importantly, it is too low relative to the factors that have historically driven market volatility.
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The CBOE Volatility Index (or VIX), a measure of market turbulence, tumbled ~12% during the week ended September 3, 2016. It was the biggest decline in two months. With VIX (VXX) (XIV) hovering around 12 as of the first week of September, it has stayed below its five-year average since late June 2016.
The S&P 500 has been treading water amid speculation about an interest rate hike and lackluster economic data. One of the reasons VIX has gotten this low is because the market just hasn’t been moving and has stayed relatively flat this summer. Volatility in August saw levels that we’ve only seen for three weeks since 1970. Because of this, options are also the cheapest they’ve been in a very long time.
On a brighter note, high-yield bonds (HYG) (JNK) reached new highs in August. From their lowest point in February to their current levels, investors have been penalized with below-average returns for their caution and rewarded for taking risks that may not work in their favor in the long run. With uncertainty surrounding interest rates as well as the upcoming presidential election, the fear index could induce some price swings into an already complacent market.
In this series, we’ll concentrate on what’s been driving volatility during this period and what could possibly end this downtrend.