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Does Low Market Volatility Portend a Market Tumble?

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.

Dead calm

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.

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Important Disclosures

Past performance is no guarantee of future results.

All market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. Supporting documentation for any claims or statistical information is available upon request.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness or reliability cannot be guaranteed.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

The Chicago Board Options Exchange Volatility Index (CBOE VIX) is an index that provides a general indication on the expected level of implied volatility in the U.S. market over the next 30 days.

The S&P 500 Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

Investing involves risk, including loss of principal.


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