What investors need to know about today's market volatility and the VIX
To any investors who managed to somehow ignore the stock market’s volatility in recent months, the first half of 2020 may have seemed unremarkable. While negative, the S&P 500 Index’s 4% decline as of June 30 wasn’t immense; another key benchmark was in positive territory, as the NASDAQ Composite Index rose 12%.1
However, the first half was anything but ho-hum. Driven largely by the devastating economic impact of the coronavirus pandemic, market volatility surged starting in late February and briefly rose to a record high in mid-March, as measured by the Cboe Volatility Index. 2 As for the market’s mixed overall performance at midyear, it was the product of a precipitous drop in late winter followed by a rapid resurgence in the spring.
While volatility has eased somewhat in recent weeks, we could be in for an extended run of turbulence. COVID-19 is still with us, along with all the economic and market uncertainty—as well as the immense human toll—that the pandemic has produced. Whatever lies ahead, it’s a good time to assess the recent spike in volatility from a historical perspective and, at a more fundamental level, review what volatility is and how it’s measured.
Volatility and the VIX explained
In an investing context, volatility is the frequency and magnitude of price movements. While most investors probably associate volatility with painful market declines, in reality, it’s a two-sided coin, as it’s a function of price gains as well. The more dramatic the market’s price swings are, the higher the level of volatility. Price changes occurring within the span of a trading day reflect what’s known as intraday volatility.
The most frequently used volatility benchmark is the Cboe Volatility Index—commonly known as the VIX, and often referred to as the market’s fear index, or fear gauge. It’s a barometer of investors’ expectations as to how much market uncertainty lies ahead over the next 30 days, as measured by fluctuations in prices for options on the S&P 500 Index.2 (Options are contracts offering the buyer the opportunity to buy or sell stock—depending on whether the contract is a call option or a put option—at a stated price within a specific timeframe.)
When investors expect uncertainty about the market’s direction will decrease, they’re less inclined to pay a premium for the potential protection that a stock option may provide against a future loss from a market decline. On the flip side, when expectations of uncertainty climb, options prices tend to rise, as does the VIX. Typically, a decline in stock prices is accompanied by a rise in the VIX. Fluctuations in the VIX’s level throughout a trading day reflect aggregate changes in options prices. As with other market indexes, the VIX’s daily closing price is calculated after the closing bell.
What’s high for the VIX? What’s low?
From January 1990 through June 2020, the VIX’s average closing price was 19.4.3 The index does occasionally descend into the single digits, as it did through an unusually quiet stretch for stocks in 2017.
During the global financial crisis, the VIX spiked to a record high of 89.5 in intraday trading on October 24, 2008; its then-record closing high came four weeks later, when it finished a trading session at 80.9.3 This year’s spike in volatility produced a record closing high of 82.7 on March 16; 2020’s intraday high of 85.5, reached on March 18, was just shy of the record set in 2008. Overall, through the first six months of this year, the VIX’s average closing high was 32.9, or nearly 14 points above its historical average.3
What volatility and the VIX may mean for investors
Market volatility can test any investor’s fortitude, and many respond by trading in and out of the market amid its gyrations, with varying degrees of success. The challenges of such an approach were easy to see during this year’s turbulence. Just before the S&P 500’s low point on March 23, it may have seemed to many investors to be a good time to sell, as the market then appeared as if it could go nowhere but down. As it turned out, the index surged after reaching that low; however, the recovery was only an incomplete one as of June 30, as the S&P 500 was still shy of the record high that it reached in mid-February.
The recent instability may ultimately prove to be a mere bump in the road for investors who stay in the market for the long haul and incrementally build up their invested savings through regular contributions to a 401(k) plan or another type of retirement account. A period of heightened uncertainty like the one we’re going through now can be an opportune time to meet with a trusted financial professional to review financial goals and follow a plan that helps you make the most of what may continue to be a challenging situation.
1 S&P Dow Jones Indices, as of 6/30/2020. 2 Cboe Exchange, Inc., as of 6/30/2020. 3 Macrotrends.net, as of 6/30/2020.