The last 12 to 24 months have exhibited low stock market volatility. As the bull market recovery started in 2009, the S&P500 has risen steadily higher each year achieving a compounded rate of return of nearly 18%. The strong growth in the market, coupled with extremely low interest rates, has motivated investors to remain invested in the equity markets without making major changes to their portfolios. Furthermore, investors and advisors are selecting passive investment vehicles, such as ETFs, versus building a portfolio of individual stocks. The overall growth since 2009 and resulting complacency in managing a portfolio have led stock market volatility to historically low levels.
The VIX (volatility index), which measures volatility in the S&P500 has been steadily declining over the last two years. The VIX can range in value between 0 and 100, however, historically, the VIX has never fallen below ~9.00, and has maxed out ~80.00. Here is a VIX chart over the last two years:
*Source: Yahoo! Finance
As you can see above, besides a couple small spikes in 2016, the general trend in the VIX has been downward since October 2015.
During our daily conversations with investors and prospective investors, many are wondering when the VIX will rise again. Furthermore, the following questions are common during these conversations:
- Historically, what is the average VIX price?
- During which months is VIX higher than normal? October? January? August?
- What are “normal” VIX levels?
The purpose of this blog post is to offer a historical price analysis of the VIX, so that an investor can analyze the VIX price and determine if stock market volatility is “normal,” “below normal,” “above normal,” or if it has “spiked/exploded.” To answer the above questions, we analyzed daily VIX data going back to when VIX data started being recorded – 1990. From 1990 to 2003, we analyzed cash VIX prices, and from 2003 to present, we analyzed the price of the VIX futures contract, which was introduced by the Chicago Board of Options Exchange in 2003. The only caveat in our analysis is that we analyzed each day’s closing prices, and did not analyze that day’s high or low price.
Historically, what is the average VIX price?
The easiest question to answer right off the bat is the average VIX price: it is ~19.50. Based on this, the current VIX price of 10.90 is quite a bit lower than the average, and very close to the all-time low of ~9.00. The 0.50% ranges in the S&P500 price recently has led to the ultra-low VIX levels.
During which months is VIX higher than normal? October? January? August?
It is either a myth or a preconceived notion that stock markets get volatile in October, or January or sometimes in the summer months (think flash crash). To test this myth, we calculated the average daily price in each month going back to 1990:
*Data as of 10/3/2017
As you can see, while there are discrepancies from month-to-month, the average monthly price (based on daily data) ranges from 19.20 and 19.65; a very tight range. October, the month when the 2008 subprime mortgage crash started, has the lowest average VIX price! January has had the highest average and August is a tie for 2nd place with February and April. Given the above data there are no specific months that stand out against the rest. Since the average price in each month is very close to the historical average, it’s hard to pinpoint one month as being the one to “watch out for.”
What are “normal” VIX levels?
While we know that the average VIX price is ~19.50, that does not necessarily mean that that translates to “normal” stock market volatility. Spikes in the VIX and outlier days, drive up that average. See below a line chart of the VIX using daily data going back to 1990:
*Data as of 10/3/2017
As you can see in the above chart, 2008 saw the largest spike in VIX, reaching greater than 80.00. However, there were many other spikes where the VIX reached levels greater than 40.00. In order to get a better idea of what range is “normal” in the VIX, we constructed a histogram of days that fall within a range of VIX closing prices:
*Data as of 10/3/2017
The values in the horizontal axis above represent how many days the VIX was equal to or less than that value. The highest number of days – 2,317 – fall between a VIX price of 10.00 and 15.00, and the second highest number of days – 1,996 – fall between 15.00 and 20.00. Furthermore, 1,410 days fall between the values of 20.00 and 25.00.
Despite the above analysis and data mining, the mystery behind “when” the VIX tends to rise remains unknown. The fact is that predicting when the VIX will rise is very difficult. Since the VIX and the S&P500 have a very strong negative correlation, this is also another way of saying, it’s very difficult to predict when the stock market may decline or crash. Given the recent low levels in the VIX, it would be prudent to proceed with caution and to diversify away from passive equity investments.