The VIX index has become popularly known as the Wall Street fear gauge. It’s one of the best windows we have into market expectations for future volatility, particularly in the S&P 500 stock index. Recent events have amplified the importance of this bill, especially after Donald Trump announced these same types of disruptive, surprise high tariffs. In early April, this announcement would trigger an episode of extreme stock volatility. The fallout to this was a historic 2-day, 10.9% selloff in the S&P 500.
In the past, the VIX index has acted as an accurate barometer of overall market sentiment in times of chaos. Since 1990, approximately half of the S&P 500’s 14 selloffs of 10% or more concluded within a week of reaching the VIX’s highest close. What’s surprising is that three of these selloffs ended on the exact day of the VIX’s peak. High volatility usually occurs during times of large drawdowns and investor panic. We think this combination considerably increases the odds of successful investments next year.
And perhaps more importantly, the psychology of market reactions distills that lowball expectations can trigger these “relief rallies” to serve as catalysts. Investors usually come rushing back to stocks in these cases when the first news isn’t as bad as expected. This behavior is illustrative of a longer-term, volatile trend in which market recovery comes after a period of extreme volatility. Our independent analysis shows there’s over a 90% likelihood of stock market gains. This happenstance happens 12 months after favorable market conditions.
Lee, a noted market analyst, stated, “tends to coincide with times of high drawdowns and investor panic, both of which lead to higher probabilities of investing success of the next 12 months.” Except, perhaps, for the rather vague but generally accepted idea that uncertain times create fruitful long-term investing opportunities.
Callie Cox, a different market expert, pointed out that the real uncertainty is still with the market itself. “We’re still trying to figure out where the new center of gravity is,” she remarked. She offered a glimmer of hope for investors: “The unexpected news part of the sell-off is probably past us, and if you are a long-term investor, now is probably the time to start buying.” She warned not to take for granted that the present environment represents the end point of the sell-off. She admitted that “history isn’t always gospel.”
Leave a Reply