By Joseph Adinolfi
Something unusual happened in the stock market this quarter: Both the S&P 500 and Cboe Volatility Index, better known as the Vix, rose.
Does this mean the unusually tranquil stretch in markets is bound to end soon? Probably not, according to one portfolio manager.
Barbara Reinhard, chief investment officer of Voya Investment Management’s multi-asset strategies and solutions platform, said the Vix’s VIX rise since hitting a four-year closing low in December is likely due to the mean-reverting nature of implied volatility.
The notion that nervous investors are hedging against a feared, imminent market crash doesn’t square with what Reinhard has heard from other financial professionals, she said — adding that Wall Street’s so-called fear gauge is still very low relative to history.
While the Vix is up 4.3% since the start of the quarter, to 12.98, the index’s long-term average is roughly 20, going back to its creation in the early 1990s, according to FactSet data.
”If the Vix is low like it is now, it is more likely to go up over the medium term. But then again, it can stay low for years, like it did during the stretch between 2012 and 2015,” Reinhard said in an interview with MarketWatch
Meanwhile, the S&P 500 SPX was on track to book a 10% gain this quarter and finish at a record high on Thursday for the 22nd time this year. The index was up 0.1% at 5,253 points in recent trade — the latest peak during what has been an unusually calm stretch for markets.
The fact that the Vix is rising while markets have shown few signs of weakness is one thing that makes the current situation so unusual.
Although both indexes have risen in tandem a handful of times in recent years, previous examples usually saw a short-lived pullback in the S&P 500 somewhere along the way.
The last time it happened was the third quarter of 2021, when the S&P 500 rose by 0.2% and the Vix gained a whopping 46%. Most of the jump in the Vix occurred that September as the S&P 500 fell 4.8%, then its worst monthly performance since March 2020, as the spread of the COVID-19 delta variant left markets unsettled.
Prior to that, the Vix rose in tandem with the index during the second and third quarters of 2019, as the Trump administration’s trade war with China triggered two short-lived selloffs in the S&P 500.
This time around, the S&P 500 has now gone more than 100 trading days — more than five months — without a 2% pullback, the longest streak in about six years, according to Bespoke Investment Group.
However, just because the Vix and S&P 500 typically observe an extremely negative correlation doesn’t mean they always will.
The Vix is a gauge of implied volatility, meaning how volatile traders expect the market to be over the coming month — not how volatile the market is currently. Its level is based on activity in S&P 500 options.
