Volatility in the markets has always fluctuated. It is never constant. There are periods of relative calm that are then accompanied by periods of massive fluctuations, both in positive and negative directions. Generally, these fluctuations are a result of market forces reacting to major news and rumors. Recently, these reports have consisted of tax reform, record company earnings, the fed’s interest rate strategy, and protectionist trade policies just to name a few. As an example, the Federal Reserve uses the Personal Consumption Expenditures Price Index to measure inflation and targets a rate of 2% as a sign of healthy economic growth. Inflation is one of two measurements (the other is unemployment) it uses to set monetary policy (interest rates). This figure hit 2% back in May and it’s the first time since 2012 this has occurred. Because of this, the Fed could likely pencil in more interest rate increases in addition to the two more already signaled for 2018. This result could add more volatility to the marketplace and it all centers around expectations that investors have about the future movement of market prices. A common measurement of volatility is the Chicago Board Options Exchange’s (CBOE) Volatility Index or VIX. This is the description of the VIX straight from the CBOE website:
“The VIX Index is a calculation designed to produce a measure of constant, 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500 Index (SPX) call and put options. On a global basis, it is one of the most recognized measures of volatility – widely reported by financial media and closely followed by a variety of market participants as a daily market indicator.”
Looking at the VIX, the average close from the beginning of 2012 through the end of 2017 is 14.96 . 2017 was a historically low volatility year with the average for that year well below the average at 11.55. According to MarketWatch, of the 56 lowest closing levels in the history of the VIX (since 1990), 47 of them occurred in 2017. In 2018 through the end of June, we’ve been seeing volatility ramp up with the average on the year so far just above the 2012-2017 average at 16.32 . We’ve also seen more large single day swings in volatility. The last full year to have seven sessions of 20% or more one day fluctuations was back in 2014. This year we’ve already had 8… and it’s only the start of July.
-Griffin Sheehy, Trading and Planning Associate