Stock markets perform better than you might expect when the market’s “fear gauge” is subdued.
Despite the many viral, economic, and geopolitical risks in the world today, volatility in asset markets has fallen to remarkably subdued levels.
The VIX Index, the market’s so-called fear gauge, has recently fallen to a reading of around 16. This is below the average since 1991 of 19.
The VIX reflects the amount of volatility traders expect for the US’ S&P 500 stock market index during the next 30 days.
The recent calm in the markets has raised alarm bells among some investors amid concerns of complacency.
However, when we look back over time, investors would have been unwise to sell stocks purely on the basis of a low VIX reading.
The chart shows how the S&P 500 has performed when the VIX has been in different historical ranges. Each range has been set to cover 5% of the VIX’s experience. For example, 5% of the time the VIX has been below 11.3, 5% of the time it has been between 11.3 and 12.0, and so on. This breakdown allows us to derive the most meaningful data.
On average, the S&P 500 has generated a return of around 15% in the 12 months following a VIX reading of 16.
Rather than being an opportune time to sell, historically this has been when pretty good returns have been earned.
Conversely, the worst time to buy has actually been when the VIX has been relatively high. Typically, the VIX spikes when markets are falling. When the VIX has been in the 20s, the knife has still been falling and investors who bought then have cut themselves.
It is only when investors turn hysterical – when the VIX has been around 30 or higher – that the best returns have been earned by the brave hearted. What happened last year is a case in point. The old adage that investors should be greedy when others are fearful shines through clearly here.
As with all investment, the past is not necessarily a guide to the future but history suggests that investors would be unwise to make their investing decisions purely on the basis of subdued levels of volatility.
This document may contain “forward-looking” information, such as forecasts or projections. Please note that any such information is not a guarantee of any future performance and there is no assurance that any forecast or projection will be realised.
The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
Past performance is not a guide to future performance and may not be repeated.
This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.
The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.
Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.
Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.