One of the measures I like to track when markets get crazy (and markets have been cray-cray people), is the Chicago Board Options Exchange (CBOE) Volatility Index, or VIX. The VIX measures investors’ expectations of near term volatility in markets. If the VIX rises, investors expect more volatility. When the market has daily shifts similar to what we have seen the past several weeks, the VIX is going to spike. And it has.
While markets seem to be riding a roller coaster right now, a little historical perspective is always helpful.
The average daily close of the VIX in 2017 was just over $11. During this most recent spate of volatility, the VIX spiked to $41 and change on February 9th and the average close of the VIX this year is approaching $18. But…during the Global Financial Crisis in 2008, the VIX crossed $80 a few times, and closed above our current cycle peak of $41 for 63 consecutive business days. While your stomach may be feeling queasy these last few weeks from all these fits and starts, we are basically on the equivalent of a kiddie ride at the local carnival compared to the high speed, triple loop coaster that was 2008.
The February 9 spike in the VIX marked its highest point since August 2015, when China devalued its currency and sent financial markets reeling. That’s right, Brexit and the surprise 2016 US election outcome have nothing on 2018! Some other notable spikes in the VIX since the Global Financial Crisis include the 2010 Greek Debt Crisis, and in 2011, the US Debt Ceiling fiasco.
While many pundits comment on sudden spikes in the VIX, today I am looking at how long volatile cycles last. By one measure, the current cycle (for the optimistic, markets do
seem to be emerging from this cycle) has stretched on longer than all others since 2009.
I compared the current day close of the VIX to the 90-day moving average close, and Monday April 16th marked the 63rd straight day the VIX closed higher than its 90-day moving average. Granted, market volatility was low prior to this stretch, but compare to other spiked-VIX events:
The good news is we broke the streak this week, with volatility easing. But why have markets been so volatile this year? Two major reasons:
1.We are in a trade war.
When President Trump was Candidate Trump, he proposed policy actions that were decidedly against free trade. But President Trump did not act on any of his trade policy until recently, a full year into his presidency. Market volatility was going to be the likely result whenever this policy took root. Secretary of the Treasury Steve Mnuchin went on CNBC a couple weeks ago and said the administration did not want to enter into a trade war. That ship has sailed! We are in a trade war with China and markets don’t know how long this war will last or how far into industry it will reach. It should be noted that rhetoric and press coverage of the trade war has slowed considerably over the past several days to a week, and not coincidentally, volatility has in turn eased
2. Midterm Elections Are Coming
The second reason for the recent spate of volatility is the increasing likelihood that the democrats win back one or both of the chambers of congress in the mid-term elections this fall. This may seem to contradict reason #1. Shouldn’t a change in Congress limit President Trump’s ability to wage a trade war? It might, but a congressional power shift likely will return us to the crippled legislative environment we saw when President Obama was dealing with a Republican- controlled Congress.
Despite Trump’s anti-trade rhetoric, when he took office he was aligned with Congress and markets welcomed that togetherness. During much of President Obama’s tenure, Republicans foolishly rubber stamped “NO” to any and all of Obama’s policy proposals, and Obama was an ineffectual leader when it came to reaching across the aisle. As a result, nothing got done. Markets surged when this toxic dynamic disappeared. But the prospects of having policy derailed again by even stronger levels of executive and legislative branch hostility has markets jittery.
Volatility has ebbed this week but expect it to increase again as trade tension with China continues and as we get closer to the mid-term elections. It’s not going out on a limb to predict that market volatility will be higher this year than last.