Low and High Market Volatility

“Let’s wait for the market to calm down.” You’ve heard, maybe you’ve said it. Whether it’s in reference to pulling current capital from the market or deploying new capital, it’s a thought that dances through our head. But is it the prudent thing to do? Should we wait for interesting times to become dull? When markets are in panic, maybe it feels good to sit this one out. But again, is that the right choice? 

We decided to look at the last 25 years of daily CBOE Volatility Index (VIX) levels, often referred to as “the fear gauge”, and then from each day the subsequent three-year forward return. The chart and the table below plot that information. Since 2000, in low volatility markets (VIX 0-15), the S&P 500 advanced on average 7.96% per year over the next three years. Conversely, in high volatility environments (VIX >45), the S&P 500 more than doubled the low volatility environments return, rising  an annualized 16.34% on average over the next three years.

What’s even more interesting is the risk of bad outcomes and volatility of returns. In the low volatility environments, the worst three-year outcome was an annualized loss of 17.13%, while returns in the environment had a standard deviation of 8.41%. High volatility environments seemingly had a larger margin of safety. The worst three-year annualized return was 0.49% while the standard deviations of returns fell to 5.43%.

So, what’s the takeaway from this? Low volatility environments are often followed by rising and high volatility and that process going from low to high volatility brings asset values down and produces lower returns. Conversely, high volatility environments are followed by failing and low volatility which boosts asset values driving higher returns. To sum up low volatility environments in a colloquial fashion, we would quote Robert Hunter’s words from the Grateful Dead’s “Uncle John’s Band”: “… Cause when life looks like easy street, there is danger at your door.”

_{This is intended solely to report on various investment views held by Fidelity Deposit & Discount Bank and is distributed for informational and educational purposes only and is not intended to constitute legal, tax, accounting, or investment advice. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. Fidelity Deposit & Discount Bank does not have any obligation to provide revised opinions in the event of changed circumstances. We believe the information provided here is reliable but should not be assumed to be accurate or complete. Data, if not otherwise noted, is as of 12/31/2024. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security. Past performance is no guarantee of future results. All investment strategies and investments involve risk of loss and nothing within this report should be construed as a guarantee of any specific outcome or profit. Investors should make their own investment decisions based on their specific investment objectives and financial circumstances and are encouraged to seek professional advice before making any decisions. Investments are not insured by the FDIC. Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. The S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large‐cap segment of the U.S. equities market.}