What is the VIX?
For those of you who unfortunately checked up on your portfolio on Monday August 5 when the S&P 500 dropped 160 points, you may still be asking yourself (and us) what actually happened that day.
Of course, no one really knows the actual answer, but it was likely a “perfect storm” of financial and non-financial events. The good news is that the market drop was short-lived (at least for this market cycle) and the S&P 500 quickly returned to its record-breaking highs (again for this market cycle)
If you dug a little deeper that day, you may have read about a massive spike in the VIX so we decided to dig a little deeper into what the VIX is and what it MIGHT mean, so we all know when it happens again.
First of all, the VIX is the ticker for the CBOE (Chicago Board Options Exchange) Volatility Index. The VIX, which is also called the Fear Index, is a real-time measure of investors’ expectations for short- term price changes in the S&P 500. It is calculated from prices of short-term S&P Index options. The index is calculated for the following 30 days and then annualized for the following 12 months. Simply, the VIX measures how fast stock prices are expected to change. In general, when the VIX goes up, stocks prices fall (investor fear is higher) and when the VIX goes down, stock prices increase (investor fear is lower).
Experts suggest the following rules of thumb:
When the VIX is between 0 and 12, investors should expect low volatility for the following 30 days
When the VIX is between 13 and 19, investors should expect normal volatility for the following 30 days
When the VIX is 20+, investors should expect higher than normal volatility for the following 30 days
The long-term average VIX reading is 21. The highest ever VIX to date was almost 83, which happened in March 2020. The second highest reading was 81 which occurred during the 2008 financial crisis. On the
other hand, the lowest VIX recorded was 9 in November of 2017? Remember that? No one does.
So what happened to the VIX in early August?
The VIX spiked above 60, with the highest ever intra-day jump, and ended very close to the “market panic” level. Within just a few days, the VIX returned to a more normal level. Experts believe there were likely several factors for the spike:
Concerns about the U.S. economy following July inflation and unemployment numbers
Any excuse to sell, given the rapid rise in technology mega cap stocks tied to big bets in AI
The steep decline in the Yen carry trade (investors borrowing Yen at very low interest rates and the purchasing U.S. or other assets with potentially much higher returns)
Nuances in calculations
World events – continuing escalation of mid-east wars, upcoming U.S. elections, China economic woes, etc.
The VIX today is 15.8. September has historically been the most volatile month of the year and the VIX has risen slightly for the last 30 days. Most of us expect ongoing market volatility for at least the next 40 days as the U.S. election nears so the VIX is a good way to see if other investors agree.