What is Low Volatility Telling Us About the Stock Market?
For much of 2024, equity market volatility as measured by the CBOE Volatility Index (VIX) has been relatively low. Some investors take this as a sign that economic and market-related risks aren’t being fully appreciated.1
Relative to the Previous Few Years, VIX in 2024 Has Been Uncharacteristically Low
The month of April was an exception. Stocks and bonds experienced heightened volatility, likely due to hotter-than-expected inflation data in Q1. The ‘sticky’ inflation prints implied higher-for-longer interest rates, which investors see as detrimental to the value of future cash flows for U.S. corporations. Accordingly, long-duration Treasury bond yields rose and stocks fell in the month, with the S&P 500 shedding -4.1%.
Time to Dig Deeper into Market Risks?
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But the spike in volatility didn’t last long.
By May, the VIX returned to low levels, spending most of the month below 13.0, with stocks back in rally mode. Consider that over the past five years, the VIX has averaged about 21.5, and over the long-term has been closer to 20.0. On May 31st of this year, the VIX registered at 12.92. As seen on the below chart of the VIX from 1990 to the present day, 2024’s low volatility is notable relative to history.
Some pundits are labeling this low volatility investment environment as ‘too sanguine,’ with markets pricing in too much optimism about falling inflation, lower interest rates, and a soft economic landing. Low volatility, the argument goes, tells us that investors are turning a blind eye to myriad economic, geopolitical, and political risks swirling around markets today. Some of the risks cited are short-term, like U.S. presidential election uncertainty, while others are long-term, like de-globalization trends resulting in higher-for-longer inflation. Either way, volatility should be higher than it is today, given the state of the U.S. and global economy.
However, I disagree with this assessment for a couple of reasons.
The first is that all of the risks highlighted above—and risks I often hear about in the context of low volatility—are either overblown, too far off into the future or widely known. Many times, it’s all three. For example, citing the risk that de-globalization will drive inflation higher makes many different assumptions about things that haven’t happened yet. There are several examples of countries ‘re-shoring’ production, sure, but global trade has gone up—not down—since these fears started to emerge.
The second reason is that current volatility doesn’t tell us about future risks or opportunities. Equity markets can get choppy for any number of reasons in the short-term, and it does not necessarily mean that a major downturn is in the offing. Remember, volatility is not just about selling pressure—markets can spike upwards, too. Looking at the 1990 – 2024 VIX chart above, readers can see that volatility was very high in the late 1990s, 2003, 2012, and 2021—all banner years for stocks.
Bottom Line for Investors
I do not expect volatility to remain subdued for the entirety of 2024. When it does arrive at some point in the future, it is important to remember that heightened volatility does not automatically mean dismal conditions are ahead. Volatility can happen at any time for any reason, and should ultimately be viewed as a good thing – it’s a normal, natural part of equity investing. Experiencing volatility from time to time means the market is functioning rationally, in my view. It is also important for investors to remember that volatility works both ways – delivering blows to the downside and triumphs to the upside over short periods of time.
When volatility happens, I think it’s almost always best to stay patient and let the volatility run its course.
You may be wondering just how to do this. I believe an important step in doing so is to focus more on the fundamentals over the day-to-day price movements.
To help you, I invite you to download our June 2024 Stock Market Outlook5.
This report includes just-released commentary and insights into the market to help you make decisions based on data and fundamentals instead of fears and media hysteria. You’ll get insight into:
• Expert Market Strategy Commentary—Earnings Matter More than the Fed
• Zacks Sector Picks—An invaluable resource for asset allocation
• Key U.S. Economic Data—The latest numbers and trends, plus key takeaways
• Global Market Data—The latest trends in global stock, bond, and commodity markets
• Zacks S&P 500 Earnings Insights—Our roundup of the latest market and sector forecasts and trends
If you have $500,000 or more to invest, get your portfolio better prepared for what’s to come by reading this new report today.
Disclosure
2 Fred Economic Data. 2024.
3 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.
4 Fred Economic Data. June 4, 2024. https://fred.stlouisfed.org/series/VIXCLS
5 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.
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