It has been a long road back to normal, but stock market volatility has fallen markedly from its heights three years ago.
The
Cboe
Volatility Index, or VIX, is has dropped to 13, near normal levels by historical standards.
Known as the market’s “fear gauge,” the VIX reflects expected volatility of
S&P 500
stock prices. The higher the number, the more the market is uncertain about companies’ future earnings and how to value their shares.
For the several years leading into the pandemic, the VIX often hovered in the low double digits, with bottoms of around 9. It spiked to above 60 in early 2020, then settled in the high teens.
In 2022, it rose back above the 20 level as the postpandemic surge in economic demand caused high inflation, prompting the Federal Reserve to rapidly lift interest rates, a move meant to reduce economic demand.
But the VIX is back down toward normal levels. The rate of inflation has declined from its peak and is nearing the Fed’s target, which means the central bank is likely to stop increasing rates. It might even cut soon.
That is why the 10-year Treasury yield is down to about 4.2% from a multiyear high of about 5%, hit in October. To be sure, economic growth is likely to slow down in the coming quarters, but with rates remaining below their peaks, the market has confidence the economy can continue to grow at some rate and avoid recession. That also means the market envisions more profit growth from here.
More important, the market is confident rates can stay down where they are. The Merrill Lynch Option Volatility Estimate, or MOVE Index, which measures bond market volatility, is down to about 111 from a 2023 peak of 180.
Confidence that rates have finished surging translates into greater confidence in the market’s ability to price stocks. Higher bond yields provide competition against the stock market, so if stock investors believe yields won’t spike anymore, it means they can continue to buy stocks at current valuations.
That is why “the VIX is back to its slow and boring ways,” says Jay Woods, chief global strategist at Freedom Capital Markets. “It’s settling in a more normalized range thanks to the retreat of the 10-year back to 4.25%. This is quite normal and welcome news for the bulls.”
Markets are just seeing a smoother ride now, and that makes for a calmer—and more investible—stock market.
Write to Jacob Sonenshine at [email protected]
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