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Volatility is back, but is it the end of the world?                                                        Join our Monthly Newsletter              August 2019                                                                                              

Mark R. Hoffman

CEO, Principal

 

Any investor in the US stock market has enjoyed a nice bull run over the past 10 years. Much has been made of the reasons why: highly dovish monetary policy, solid earnings growth, reversion to the mean following the 2008-09 correction, historically low volatility, etc. But these last few weeks have many investors nervous. Volatility in the US stock market is back. But does that signal the end of the world?

As I write this article, the CBOE Volatility Index(1) (the “VIX ”) has jumped from 14 at the beginning of August to the low 20’s. That’s a 40%+ jump in less than two weeks! Enough to make anyone worry. But just how worried should we be?

First, let’s put the current VIX reading in historic context. Here is a look at the daily VIX since the creation of the index in 1990(2):



Since January 1, 1990, the average daily reading of the VIX has been 19.05. Is the current reading (I’m writing this on August 7 at 2:00 pm) of 20.1 higher than the average? Yup. But it has only been higher than this average for the last four days. Is it high for the year? Well, no. Most of us have forgotten that the year started out with pretty wild volatility and the VIX opened 2019 at 23.

Next, we ask the question, “Does a high VIX reading spell doom for stock market returns?” We looked at that, too. While we have given back some of the gains for the year, the S&P 500 total return (as of 8/7/19) stood at 13.9%. That’s a pretty healthy return and well above long-term averages skewed by the internet and dot-com era when the S&P returned 20%+. But that’s just one data point. What if you look at the entire sample (since 1990)? On the next page is a scatter chart of average daily VIX per year (horizontal axis) vs. the S&P 500 total return for the year (vertical axis). The red dot is where we are today in 2019.

             

I ask you to look at this chart and tell me whether or not there is a correlation between a high VIX level and low S&P return. If you look hard enough, you might say “yes,” but it would be a weak yes. [Truth be told, there is a very mild statistical significance of the correlation of these two.] But as we used to say in the consulting world, “A duck could not fly through this chart.”

So to sum up…Has volatility picked up? That depends on your time frame. Over the past month, yes. Since the beginning of the year, no. Versus long-term historic averages, we are very nearly on it. Does a high VIX reading mean lower stock market returns? Sometimes yes, sometimes no. But where we are right now – at this moment in time – does not tell us that everyone should panic. What everyone should do is adopt a solid, proven investment strategy and have the discipline to follow it. There will be ebbs and flows. But a knee-jerk reaction to a spike in volatility will more often hurt you than it will help you.

 

(1) Created by the Chicago Board Options Exchange (CBOE), the Volatility Index, or VIX, is a real-time market index that represents the market's expectation
of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors'
sentiments.
(2) Source: www.macrotrends.net/2603/vix-volatility-index-historical-chart
(3) Source: www.macrotrends.net/2526/sp-500-historical-annual-returns, www.macrotrends.net/2603/vix-volatility-index-historical-chart

 

  

Mark is a co-founder of Lanier Asset Management and serves as its Chief Executive Officer. Prior to founding Lanier, he was a partner at The Boston Consulting Group. Mark is an honors graduate of The University of North Carolina at Chapel Hill with a BA in Economics, and holds an MBA from The Harvard Business School.


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June 2019: Concerns of an Economic Slowdown?

May 2019: Benefits of Hedge Fund Investing

April 2019: Yet Another Burden On The US Economy

March 2019: Capitalism vs. Socialism: The Debate is Alive and Well

February 2019: What Are the Most Important Factors for Investing in a 401k Plan?

January 2019: A Look Back and a Look Ahead

December 2018: The Inverted Yield Curve - In Layman's Terms

November 2018: A False Sense of Security

October 2018: Reflections From Over Four Decades

September 2018: A Decade of Assisted Recovery

August 2018: The Entitlements Train Wreck - Possible Solutions?

July 2018: Is Wage Growth In This Country Improving Over Time?

June 2018: The Impact of Corporate Tax Reform

May 2018: Kentucky Derby Talks - Bulls vs. Bears

April 2018: How Much Longer Can Interest Rates Stay So Low?

March 2018: Policies For Economic Growth

February 2018: Volatility

January 2018: So What's In Store For 2018?

December 2017: Tax Cuts and Jobs Act: Good or Bad for Me? It Depends.

November 2017: Whack-A-Mole - D.C. Style

October 2017: Should You Consider a Robo-Advisor?

September 2017: Alternative Investments - What and Why?

August 2017: The QT Quandary

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June 2017: Quality of Life Influencers

May 2017: Repatriation Myths and Realities

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February 2016: Winners and Losers of the Oil Battle

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April 2015: Out on an Island – Preparing for the Fed Rate Hikes

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February 2015: European Central Bank Tries QE – Will it Work?

January 2015: 2014 Recap