Understanding Volatility and the VIX: A Look at Recent Trends and Future Outlook

Yesterday, the VIX, a commonly used measure of market volatility, expired at 18.69, which is on the lower end of the range we have seen lately and much lower than the nearly 22 VIX we saw ahead of the CPI number less than one day ago. In this article, we’ll take a closer look at recent trends in volatility and the VIX, explore what they might mean, and offer insights into what investors can expect in the future.

Trend 1: Volatility Spikes Ahead of Major News Events

This drop in volatility is not surprising, as it has been a common trend in 2022. We often see volatility spike ahead of major news events, only to sell off right after. The VIX measures 30-day implied volatility, and once the event is off the calendar, the market will reprice risk accordingly.

Trend 2: Lack of VIX Spike at the End of Bear Markets

Despite rapid market swings on Tuesday, the volatility index was still lower. However, one thing to keep in mind while watching the VIX is the lack of a spike that typically characterizes the end of a bear market. In 2022, the VIX peaked early near 39 in February. Meanwhile, the stock market continued to fall lower, and the VIX also went lower. One popular contrarian indicator that is employed is watching for a VIX top paired with a market bottom to signal extreme fear, which is a market bottom. Many people believe for a bear market to end this needs to happen, and what we are witnessing recently in the market is just a bear market rally.

Trend 3: Strong Economy but Tricky Spot in the Fed Cycle

However, it’s essential to be mindful that last year’s bear market was not caused by a weak economy. In previous bear markets, a weak economy drove stocks lower, which turned into credit risk events, ultimately causing extreme VIX spikes. Right now, the economy is still strong, even though we are in a tricky spot in the Fed cycle. We are close to the end of the Fed rate raising, and historically, it can be a great time to be in equities, even if recent history suggests that it might just be a bubble.

Outlook: Investing in US Equities

Whether or not we are witnessing a bear market rally or the start of a new bull run is yet to be determined. Short-term trends are challenging to predict, but for long-term investors, it is easier to identify the long-term trends that will not change. Over the long term, investing in US equities is a smart move, and we should expect significant periods of volatility. Investors can profit from both by being mindful and strategic in their approach.