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Why Volatility Remained Low In 2014

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The recent bouts of volatility is still haunting many investors.

At one point in October 2014, the VIX, an index that measures the U.S. market’s implied volatility, surged to over 26 – nearly two times its average of 14 in 2014.

Volatility remained low for most of 2014.

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Market Realist – Volatility remained low for most of 2014.

For most of 2014, the volatility (VXX)(XIV) in the US remained subdued. This was mainly because earnings and GDP (gross domestic product) growth remained robust and equity markets (SPY)(IVV) were complacent for most of the year. The average for the year was ~14, versus ~20 for the last decade or so, as the graph above suggests.

However, in October, market volatility spiked, as China (FXI) and Europe (EZU) showed signs of slowing down further. The volatility index increased to ~26 in mid-October, which was the highest for the year.

The volatility index (or VIX) is often referred to as the “fear gauge.” A high level usually shows that investors are spooked for some reason.

This year, markets have been slightly more volatile than they were in 2014. The situation in Greece (GREK), lofty stock valuations, and a stronger dollar have been headwinds for the markets, resulting in higher volatility. The VIX stood at 22.4 in mid-January.

However, since then, volatility has calmed down due to a number of reasons. The economic data from Europe and Japan (EWJ) have been encouraging, the job market in the US seems to have improved, and most stocks have beaten their earnings estimates for 4Q14.

Read the next part of this series to find out about a surprising volatility hedge.

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