Today, we are bringing you an overview of the volatility index, and how it performed in a year marked by uncertainty, and macroeconomic and geopolitical developments.
First of all, what is the volatility index? The volatility index, VIX for short, is an index that represents the market’s expectations for the relative strength of near-term price changes of the S&P500 index. As it is derived from the prices of the S&P index options with near-term expiration dates, it is able to generate a 30-day forward projection of volatility. Volatility would refer to how fast the price changes are recorded, and this can be used to measure the market sentiment, especially the negative sentiment (fear) among investors. VIX levels over 30 can be considered risky, as it would mean that the market expects strong volatility.
With 2022 being a year of high uncertainty, inflation rates, and developments both on the macroeconomic and geopolitical levels, looking at how the VIX developed during this period can give us a gauge of how the market reacted.
Since the beginning of the year, the S&P500 index recorded a decrease of 17%, while as compared to the pre-pandemic levels, it has increased by 23%. However these changes do not reflect just how volatile the market can be, and as such the VIX index can come in handy.
VIX index movements (2015 – YTD 2022, points)
Source: Bloomberg, InterCapital Research
As can be seen in the figure above, the VIX index recorded an increase of 28% YTD, while compared to the pre-pandemic period, it increased by 61%. In other words, the volatility on the market has increased significantly since before the pandemic, which considering the developments in the world we have seen in this period, is not surprising. Currently, the index stands at 22 points, while its all-time-high in 2022 amounted to 36.45, and this was recorded on 7 March 2022, 2 weeks after the start of the Russian invasion of Ukraine, and in the time period when several extensive sanction packages were being considered and implemented on Russia.
However, the VIX reached its highest point on 16 March 2022, when it amounted to 82.69 points, just showing us how huge of an influence the start of the COVID-19 pandemic had on the financial markets. This makes sense as the VIX and S&P500 are negatively correlated Since negative news has a much stronger impact on the overall market sentiment and thus investor decisions to buy/sell the stocks they own, this is to be expected.
VIX vs S&P500 (2015 – 2022 YTD, %)
Source: Bloomberg, InterCapital Research
Looking at the longer time period, say since 2015 however, we can see that the volatility does even out. In fact, the average VIX value since then amounted to 18.7. If you invested in the S&P500 since 2015, it would yield a return of 92.6%. This would mean that even though the volatility does have massive effects in the short-term, its effects are not that long-lasting, and even the current volatility we can see on the market will surely even out in a longer time period.
