Volatility Index

There are many ways to measure uncertainty in the financial markets. One of the tools most utilized is the Volatility Index, or VIX, from the Chicago Board Options Exchange. The VIX measures the price movement of S&P 500 index options. For reference, a rising VIX index is correlated with falling stock prices, while a falling VIX index?is?correlated?with rising stock prices.?

Many market participants focus on the VIX level of 20 and above as a reflection of heightened volatility.?Looking at the onset of COVID-19 in early 2020, you can see an extreme spike, which is?most often associated with a crisis-type event.?In the wake of the pandemic and the bear market of 2022, investors experienced many periods of elevated levels on the VIX.?

As it happens, investors?have recently endured the first sharp rise in the VIX of 2024.?But there remains good news. During this recent stock market pullback, the VIX's rise has yet to pierce the?demarcation?of 20 and is back down to approximately 15. Investors have temporarily put the recent warm inflation readings and geopolitical undertones of the market aside. The keyword is "temporarily," as these worries will likely resurface.?

However, what's just as meaningful as the COVID-era VIX spike in 2020 are the smaller bouts of volatility investors encountered routinely after the initial spike. Equity investors must always be ready to encounter periods of downside price movements and higher levels of volatility. The good news is equity prices tend to move higher over time and recover from periods of heightened volatility and related price declines.

As this commentary is?being written, investors just received confirmation that the Federal Reserve will be leaving rates unchanged, which was?essentially?a forgone conclusion?prior to?its meeting.?One?interesting?development from the meeting was that the Fed lowered its balance sheet runoff more than expected, from $60 billion to $25 billion?a month. In addition, Fed Chair Powell, in his post meeting press conference, reiterated confidence that inflation would fall towards their 2% target “later this year”. All else equal, this development should be good for equity markets and provide an environment where the VIX remains well below any crisis levels. ?

This week's commentary is provided by Mark Gibbens, CFA, CAIA, CFP? , Investment Strategist at BOK Financial.

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