While stock market indexes set record, after record, after record in 2017, perhaps the most impressive aspect of what is now the second longest bull market in history is the record-low volatility. Stocks were levitating last year instead of bouncing.
The most-widely followed measure of volatility, the CBOE Volatility Index known as the VIX, posted an average of just 11.105 for 2017, the lowest since the VIX’s creation in 1993. The true low in volatility for 2017, was 8.84 on the VIX, hit during the day on July 26 (other than a very brief “flash crash” down to 8.56 on November 24 from which the VIX quickly recovered). Compare that to a more typical reading in the high teens, above 30 during times of turmoil, and over 80 during the worst of the 2008 panic.
Some pundits and journalists say 2017’s abnormally low VIX is a reflection of investor complacency, which could be a prelude to trouble. “Plunge in Volatility Index Stokes Fears Over Crash,” warns The Telegraph. “Historically, low volatility as measured by the VIX has preceded a market crash,” cautions Quartz.
It is true that the last year of extremely low volatility came in 2006, when the VIX averaged 12.8 and hit a daily low of 8.6, prior to the market turmoil of 2007-2008.
But that does not mean the stock market is headed for a plunge this year. History shows markets can remain quiescent for two or more years at a time. The quiet of 2006 was preceded by an equally calm 2005 when the VIX also averaged 12.8.
Yes, sooner or later, volatility will return to the stock market. At some point there will even be a serious correction, and, eventually, a major selloff. But 2017’s low volatility is no predictor of a plunge.
Disclosure: I am/we are short VIX futures.