The Chicago Board Options Exchange Volatility Index® (a.k.a. VIX®) fell to a decade low of 9.36 earlier this year,1 half its long-term average of around 19. That’s raised concerns among some analysts that investors aren’t worried enough about the market’s downside. The last time the VIX fell below 10 was about 10 months before the onset of the Great Recession.
The VIX hasn’t been this low since early 2007.
Source: Federal Reserve Bank of St. Louis. Data from 01/03/2007 through 08/08/2017.
So does this recent low signify a similar tumble? Probably not, says Randy Frederick, vice president of trading and derivatives at the Schwab Center for Financial Research, who explains that the VIX merely measures how much volatility investors can expect to see in the S&P 500® over the coming 30 days, based on the index’s options prices. “A low VIX reading has provided an accurate signal of a short- or long-term pullback only once in the past 25 years,” he says. “Of course, it could happen again, but it’s more likely to be coincidence than correlation.”
Rather than fretting over whether there’s enough worry in the market, Randy suggests that investors focus on fundamentals and adequately diversify their holdings. “You can’t control the markets,” he says, “but you can try to control the overall health of your portfolio.”
The bottom line: Staying focused on long-term goals can help you ride out market volatility.
1Federal Reserve Bank of St. Louis, as of 07/21/2017.