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Home » Markets » Wall Street’s fear gauge drops below 13. What it could mean for stocks over the long run.
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Wall Street’s fear gauge drops below 13. What it could mean for stocks over the long run.

Crypto Observer StaffBy Crypto Observer StaffDecember 1, 2023No Comments2 Mins Read
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Wall Street’s “fear gauge” hasn’t been this low since before the COVID crisis of 2020 took hold.

The Cboe Volatility Index
VIX,
a gauge of expected stock-market volatility over the coming 30 days, has been trading below the 13 mark since last Friday, when it closed at 12.46, its lowest finish since Jan. 17, 2020, according to Bespoke Investment Group.

High “Vix” readings generally are interpreted as positive for stock-market returns.

In a recent example, the Vix briefly climbed above the 20 mark in mid-October as the benchmark 10-year Treasury yield
BX:TMUBMUSD10Y
surged to a 16-year high of 5%, unleashing turmoil in financial markets.

The S&P 500 index
SPX
shortly thereafter rallied as bond yields eased back, putting the equity benchmark on pace for a 8.6% gain so far in November, according to FactSet data.

However, stock market performance lately has been largely driven by bond yields and expectations about the Federal Reserve’s likely next moves on interest rates.

Still, Bespoke Investment Group analysts wanted to compare stock-market returns and Vix extremes since 1992, with a focus on periods when the fear gauge had been flashing unusually low, or uncommonly high, readings.

They found that when the Vix was trading in the lowest five percentile range, relative to its two-year range, that returns for the S&P 500 averaged almost 7% a year later. Likewise, when the Vix was right near two-year highs, forward one-year returns averaged 13.8%.

However, they also found “a variance of returns that you could fly a wide-body jet through (rather than a truck),” when the Vix was near its two-year highs.

The blue dots show one-year returns, varying from a gain of 75% to a loss of 47% when the Vix was at extremely high levels.

Low Vix readings also can be a sign of dangerous levels of market complacency, which can come back to bite, as was the case in March 2020 when the U.S. adopted widespread COVID lockdowns that tanked financial markets.

Still, “the variance of returns following periods of a high VIX reading have been significantly greater than the variance of returns following low readings,” the team wrote, in a Tuesday client note.

Read the full article here

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