Joe Tigay Navigating Market Volatility: What the VIX Signals for Investors After the Election
We all know the VIX , the fear index, by now, but here’s a quick refresher. The VIX is an index measuring expected movement in the S&P 500 based on options—essentially insurance premiums for stocks. When people buy options, they’re insuring against risk, and, like flood insurance near a river, the higher the cost, the higher the perceived risk.
So, when the “insurance” on stocks gets pricier, it signals expectations of big market moves—up or down. This pricing in of volatility often foreshadows the market’s next significant shift.
Lately, we’ve seen something unusual in the markets. Typically, when stocks go up, the VIX (Volatility Index) heads down, and when stocks fall, the VIX rises. But in recent months, both the VIX and stock prices have been climbing together. This is a rare pattern that signals something worth paying attention to—it’s a unique dynamic that can hint at big shifts ahead.
The VIX decisively broke out of its five-year downtrend in August. Since the onset of COVID-19, we’ve observed a pattern of consistently lower highs and lower lows in the VIX, signaling a prolonged period of market complacency. However, August brought a turning point. As the Yenmageddon carry trade unraveled, the VIX stirred from its slumber and began forming higher lows, indicating a shift in market sentiment and an increase in volatility expectations. This resurgence showcases the market’s reaction to emerging risks and uncertainties, marking a significant moment in volatility dynamics.
Recent price movements bring to mind historical precedents, with 2007 serving as a prime example. Following the 2001 recession, the VIX consistently recorded lower lows and lower highs while the market surged, fueled by the housing bubble. Then, just two months before the market reached its all-time high, the VIX awakened from its slumber as the Fed injected emergency liquidity into the system. This pivotal shift in volatility marked a significant turning point, foreshadowing the impending market upheaval. The VIX climbed to 80 and the market retreated 50%.
The same scenario unfolded in 2022. After fantastic years for stocks in 2020 and 2021, the VIX sprang to life just before the market hit its all-time high. This awakening was a clear signal, leading us directly into the inflation concerns that dominated trading in 2022.
However, a spike in volatility isn’t always a harbinger of doom. In 1995, we observed a similar signal, yet the stock market was poised for a significant upward surge. Volatility traders anticipated a major move, and this time, their expectations were met as the stock market soared to new heights.
Life often teaches us that expectations can lead to disappointment, and we may overlook the broader picture. Just because we perceive a temporary setback doesn’t mean opportunities aren’t waiting to be discovered. There’s always a bull market somewhere, even in uncertain times.
When one door closes, another opens, revealing new avenues for growth and investment. The reality is that the future may not unfold as optimistically or as grimly as we imagine. Instead, it will simply be what it is—a landscape filled with both challenges and opportunities. Embracing this mindset will help us adapt and thrive, regardless of the external circumstances.
