August 8 2016
It’s déjà vu all over again!
The Chicago Board of Options Exchange (CBOE) Volatility Index, also known as the VIX, tracks the prices of options on the Standard & Poor’s 500 (S&P 500) Index. Since options often are used to hedge portfolio risk, the VIX is considered to be a ‘fear gauge’ that has value with regard to market volatility during the next 30 days. The VIX moves higher when investors are worried and lower when they’re feeling content. While this is not necessarily predictive, it does measure the current degree of fear present in the stock market.
Last Friday, the VIX dropped to 11.18, which was a two-year low. Financial Times attributed investor complacency to “…a buoyant U.S. jobs report and easy monetary policy.” However, it also pointed out analysts’ concern that the current lack of fear reflects a disregard for threats to world economic stability as well as sparse trading during a vacation month.
Last year in early August, we saw a similar phenomenon. The VIX reached very low levels and then it zoomed from 13 to 53 between August 18 and August 24. At 53, the VIX was higher than when Standard & Poor’s cut the credit rating of the United States in 2011, or at the apex of the European debt crisis in 2010. Barron’s explained last year’s move like this:
“…volatility isn’t simply a measure of fear. It has been used to manage risk in portfolios that employ sophisticated trading schemes…Although each type of fund adjusts to market changes at a different speed, they all respond in the same way – by selling stocks…”
There is no gauge to predict whether the VIX will remain low or bounce higher during the next 30 days, but some big name investors are feeling bearish despite the VIX’s outlook for short-term calm. Barron’s reported, “elder statesmen of the markets, including Stanley Druckenmiller, George Soros, and Carl Icahn, all have deemed themselves negative on stocks…”
Regardless, the S&P 500 Index and the NASDAQ finished the week at record levels.
- Data as of 8/05/161-WeekY-T-D1-Year3-Year5-Year10-Year
- Standard & Poor’s 500 (Domestic Stocks)0.0040.0680.040.0850.1270.055
- Dow Jones Global ex-U.S.-0.81.5-7.5-1.11.10
- 10-year Treasury Note (Yield Only)1.6NA220.127.116.11.9
- Gold (per ounce)-0.126.223.50.9-4.27.5
- Bloomberg Commodity Index-0.56.7-7.7-12.5-11.7-7.2
- DJ Equity All REIT Total Return Index0.216.121.114.215.67.2
*Indices are unmanaged and investors cannot invest directly in an index.
*Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
*S&P 500, Gold, Dow Jones Global ex-Us, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend).
*The DJ Equity All REIT Total Return Index does include reinvested dividends.
*All investments involve risk – coins and bullion are no exception. The value of the bullion and coins is affected by many economic circumstances, including the current market price of bullion, the perceived scarcity of the coins and other factors. Therefore, because both bullion and coins can go down as well as up in value, investing in them may not be suitable for everyone. Since all investments, including bullion and coins, can decline in value, you should understand them well, and have adequate cash reserves and disposable income before considering a bullion or coin investment