Does low volatility mean a shock lies in store for investors?

Duncan Lamont
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Despite the many economic and geopolitical risks in the world today, volatility in asset markets has been remarkably subdued.

The Vix index, the market’s so-called fear gauge, has recently fallen to a reading of around 10. This is exceptionally low compared to long-term norms. and only just above the all-time low of 9 that it fell to in 1993. Since 1990, it has averaged 20.

The Vix reflects the amount of volatility traders expect for America’s S&P 500 during the next 30 days.

The recent calm in the markets has raised alarm bells among investors amid concerns of over-complacency.

However, when we look back over time, investors would have been unwise to sell equities purely on the basis of a low Vix reading.

The chart below shows how the S&P 500 has performed when the Vix has been in different percentiles of its history. For example, 5% of the time the Vix has been below 11.6 and 5% of the time it has been between 11.6 and 12.2, and so on. This breakdown allows us to derive the most meaningful data.

When the Vix has been in its lowest 5% of readings (at a level of 11.6 or less), the S&P 500 has historically generated an average return of 11% over the subsequent 12 months, according to Schroders analysis.

Rather than a foreteller of doom, a low Vix has in fact been associated with quite healthy returns. Not as healthy as when the Vix has been slightly higher but good nonetheless.

Chart: Next 12 month S&P 500 return based on different starting Vix

Conversely, the worst time to buy has actually been when the Vix has been relatively high. Typically, the Vix spikes when markets are falling. When the Vix has been in the 20s, the knife has still been falling and investors who bought then have cut themselves.

It is only when investors turn hysterical – when the Vix has been around 30 or higher – that the best returns have been earned by the brave hearted. The old adage that investors should be greedy when others are fearful shines through clearly here.

As with all investment, the past is not necessarily a guide to the future but history suggests that investors would be unwise to make their investing decisions purely on the basis of subdued levels of volatility.

Important Information: The views and opinions contained herein are those of Duncan Lamont, Head of Research and Analytics, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The sectors and securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.

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