Insurance
Courtesy of Joshua M Brown
Something interesting going on – the Vix, which I never refer to as “the fear gauge” because I’m not a child, is rising along with stock prices. The Vix is an index of options activity that represents the way people are trading and what their expectations are for volatility.
By the way, “Rising” might be a tad misleading given the ultra-low level the index is coming up from, but still, people are seeking insurance against the possibility that stocks will fall. Which is what they are supposed to do.
The Wall Street Journal:
In an unusual occurrence, the VIX has moved the same direction as the S&P 500 on over half of trading days in January. The VIX has risen 4.9% this year and closed Thursday at 11.58, while the S&P has jumped 6.2%, in its best start for any year since 1987, according to The Wall Street Journal’s Market Data Group.
Some context – the long term historical average Vix is more like 20. It’s like 11 or 12 these days when elevated and spends most of its time around 10. Last year it didn’t get above 15, which is remarkable. More remarkable would be if it can repeat that this year.
But thinking of the long, long, long term, there’s an argument to be made that the 20 average is permanently a thing of the past, even though there will be periodic spikes. Markets mature. Why should the volatility, on average, be the same as it was fifty years ago given the professionalization of investing, the advent of retirement portfolios, the popularity of ETFs and indexing, the better behavior of fiduciary RIAs as opposed to the old churning business models of brokers, the emotionless activity of machines and software traders, etc?
So maybe a higher Vix regime comes but doesn’t get as extreme as in prior eras? Worth thinking about.
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