War rages in Europe, China’s economy is faltering and the U.S. Federal Reserve may yet have more rate hikes up its sleeve. But for investors, all is Zen.
The past few months have brought a stretch of remarkable calm for stocks, with shares of tech companies soaring and pulling the S&P 500 index with them. So far this year there have been just 16 days on which the U.S. benchmark index traded down more than 1 per cent, and the last time was back in mid-May, the longest such stretch since 2019.
The most-watched measure of investor chillness is the CBOE Volatility Index, or VIX. It’s also known as the “fear gauge” and reflects the implied volatility of the S&P 500 by tracking demand from investors for financial instruments that protect them against market losses. In other words, when uncertainty reigns and the VIX rises, stocks sell off – vice versa in periods of optimism.
After spiking above 30 in March amid the U.S. banking crisis, the VIX now sits just above 13, close to its lowest level since the pandemic began and well below the long-term average of 20.
One big explanation for the calm is that recession talk has once again given way to predictions of a soft landing for the economy. Corporate earnings in the second quarter have so far beaten expectations. Most of all, investors are convinced central banks are done raising rates now that inflation has eased.
But how long will the calm continue? There’s no such thing as a crystal ball when it comes to stocks, but the history of the VIX does hint at bumpier times ahead. Over the past three decades daily volatility has, on average, fallen to annual lows in July before climbing in August and peaking in October.
There are caveats. A handful of ultra-volatile years such as 2001, 2008-09 and 2020 pull up average volatility in the fall; however, even after those years are stripped out, the VIX daily average still begins to climb in August. On the other hand, there are also plenty of years in which the VIX stays flat all year.
For now, investors seem content to enjoy the calm while it lasts, however long that might be.
Decoder is a weekly feature that unpacks an important economic chart.
Jason Kirby