Most drivers of volatility are fundamentally positive, so that fact that 2017 has so far been a year of unusually low volatility in US equities is not necessarily a reason to be uncheerful.
The one thing we can say with certainty is that whenever the VIX volatility index falls below 10 it will subsequently rise above it.
Since 1990, the VIX has only dipped below 10 fifteen times, but six of those times have occurred in 2017, so it has been a year of unusually low volatility. Does that mean equity markets are due for a correction? Not necessarily. The correlation between the level of the VIX and the subsequent one-month, three-month, or one-year return in the S&P 500 is near zero. Of all the times the VIX has fallen below the lowest decile (12.1), subsequent one-month returns have in fact been positive nearly two-thirds of the time.
We believe the current drivers of low volatility in equity markets will persist, from supportive central banks to steady earnings growth. There are reasons to be concerned when so many markets are so calm, because any upset could have an exaggerated impact. But as most drivers of low volatility are fundamentally positive, a low VIX is not by itself a reason to expect poor future equity returns.
Click here to read more about why low volatility need not spell poor returns on equity investments.
