The VIX: A Hopeful Sign for a Less Fearful Future

What is the VIX?

The CBOE Volatility Index, commonly referred to as the VIX or the “fear gauge,”1 is a relatively new index, with roots tracing back to the early 1990s. The VIX measures market volatility specifically for the S&P 500, measuring price inputs to represent a 30-day forecast of market risk and investor sentiment. When the VIX is high, it indicates fear and volatility will be high, and there will be more day-to-day movement.

We can see this exemplified in the chart below, where the blue line represents the S&P 500 and the red line represents the VIX. They mirror each other: the VIX was low in January and both remained steady through early February, until the S&P became more volatile and experienced decline starting in late February. At the same time, the VIX rose to unprecedented levels, reflecting the fear that helped drive volatility in the market.

Since the conception of the VIX, the index has only reached record levels twice: first in 2008, when it reached just around 80, and recently in March of 2020 when it actually surpassed that number.

^{Source: Yahoo Finance}

Now, let’s look at another graph that also mirrors the one above: Daily Change. During times of stability and steadiness in the VIX, daily changes remain steady and low as well. When we get to March and notice high volatility in the VIX, we also see more daily changes occurring. The key word here is change; while not intrinsically positive or negative, these changes are reflected by steep lows and sharp highs alternating together with high volatility.

^{Source: Yahoo Finance}

With so much social, medical and financial uncertainty, and unprecedented levels of fear, the resulting market drops and gains are all part of anticipated day-to-day movement during such times. Once volatility lowers as a result of fear subsiding, day-to-day sharp changes should decrease.

For many CWM clients, this volatility may be more keenly felt over the coming months. Our investment philosophy prioritized limiting loss in March, and we’ve since bought back in at what we think are bargain prices. But we should anticipate higher than normal ongoing day-to-day volatility, at least for the near term – and we’ll all have to find ways to hold fast through the sharp peaks and valleys.

Fortunately, while we anticipate ongoing volatility, we have also seen some signs of hope. Since March 16, the VIX has been on the decline overall.²

When we were preparing this post on April 3, as shown in the chart below the S&P declined ~1.5% – a relatively small move with the VIX at this level – but the VIX was down even more at ~8%. It has consistently held in the 40’s, about half of its recent record high – a strong suggestion that fear may be subsiding faster than the market loses value.

Friday, April 3, 2020

^{Source: Yahoo Finance}

Four days later, as the S&P swung back up 1.66 percent, the VIX was down further relative to the week before – further reinforcing that through the market’s ongoing peaks and valleys, it appears that fear is steadily declining.

Tuesday, April 7, 2020

^{Source: Yahoo Finance}

There is no shortage of fear going around, and maybe you find yourself a bit fearful for the future, too. Our advisors at CWM are here to lend a listening ear and serve as your partner through these changing times. Please contact us if you’re interested in learning more about our approach during volatile market conditions – or if you’re interested in becoming a CWM client yourself.

We’re fully prepared to hold client consultations via video or phone conference to support social distancing and do our best to be thoughtful stewards of financial – and community – health. 

If you have questions or comments about the above subjects or other investment or financial planning topics, I would love to have a conversation! Feel free to email me or call (425) 778-6160.

Sources:

¹ Investopedia

² Yahoo Finance (as of April 3, 2020)

This material is for general informational purposes only and is not intended to be a substitute for specific professional financial, tax or legal advice. Individual circumstances may vary.

Investing involves risks including the potential loss of principal. No strategy, such as diversification or rebalancing can assure success or protection against loss. Past performance is no guarantee of future results.