What's market volatility and the VIX?
If there’s one thing investors know for sure about financial markets, it’s that they’re unpredictable. This means that market volatility is unavoidable, and the first step towards better dealing with volatility is to understand what it is and how it can affect your portfolio. Here’s what you need to know.
Volatility and the VIX explained
In an investing context, volatility is the frequency and magnitude of price movements in the stock market—or, more specifically, a market index. While most investors probably associate volatility with painful market declines, in reality, it’s a two-sided coin, as it’s a function of price gains as well. The more dramatic the market’s price swings are—whether those swings are market increases or decreases—the higher the level of volatility. Price changes occurring within the span of a trading day reflect what’s known as intraday volatility.
The most frequently used volatility benchmark is the Cboe Volatility Index—commonly known as the VIX and often referred to as the market’s fear index, or fear gauge. It’s a barometer of investors’ expectations for market uncertainty over the next 30 days—that is, it’s a forward-looking indicator of expectations for market volatility. It’s measured by fluctuations in prices for options on the S&P 500 Index. (Options are contracts offering the buyer the opportunity to buy or sell stock—depending on whether the contract is a call option or a put option—at a stated price within a specific timeframe.)
When investors expect more uncertainty in the near future, they bid up the prices of options, so the VIX rises. On the other hand, if they expect calmer markets, option prices fall, causing the VIX to decline. Typically, a decline in stock prices is accompanied by a rise in the VIX, especially when price declines are more pronounced.
What’s high for the VIX? What’s low?
From January 1990 through March 2022, the VIX’s average closing price was 19.5. The index does occasionally descend into the single digits, as it did through an unusually quiet stretch for stocks in 2017.
A picture of market volatility
Cboe Volatility Index (VIX), January 1990–March 2022
Source: Manulife Investment Management, Macrobond, as of March 4, 2022
During the global financial crisis, the VIX spiked to a record high of 89.5 in intraday trading on October 24, 2008. The record closing high, however, was seen on March 16, 2020, at the height of the COVID-19 pandemic; on that day, the S&P 500 lost 11.98%.
What volatility and the VIX may mean for investors
The first thing to note is that the VIX is an index, so just like any other index, it’s not directly tradeable. There are products such as exchange-traded funds that can be used to trade the VIX, as well as tradeable options and futures on the VIX (for more sophisticated investors), but unless you hold one of these products, movements in the VIX wouldn’t directly affect your portfolio.
However, the way that the VIX can affect your portfolio is psychologically. Thanks to its reputation as a fear gauge, when the VIX rises, investors—seeing that others in the market are expecting volatility and uncertainty—may be prompted to panic sell, which could affect long-run performance of individual portfolios. Any period of heightened uncertainty can be an opportune time to meet with a trusted financial professional to review your financial goals and follow a plan that helps you make the most of what may continue to be a challenging situation.
Important disclosures
Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person.
All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment, or legal advice. Clients and prospects should seek professional advice for their particular situation. Neither Manulife Investment Management nor any of our affiliates or representatives (collectively Manulife Investment Management) is providing tax, investment or legal advice.
This material is intended for the exclusive use of recipients in jurisdictions who are allowed to receive the material under their applicable law. The opinions expressed are those of the author(s) and are subject to change without notice. Our investment teams may hold different views and make different investment decisions. These opinions may not necessarily reflect the views of Manulife Investment Management. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.
Manulife Investment Management shall not assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment approach, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.
A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other preexisting political, social ,and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.
Manulife Investment Management
Manulife Investment Management is the global brand for the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than a century of financial stewardship and the full resources of our parent company to serve individuals, institutions, and retirement plan members worldwide. Headquartered in Toronto, our leading capabilities in public and private markets are strengthened by an investment footprint that spans 18 geographies. We complement these capabilities by providing access to a network of unaffiliated asset managers from around the world. We’re committed to investing responsibly across our businesses. We develop innovative global frameworks for sustainable investing, collaboratively engage with companies in our securities portfolios, and maintain a high standard of stewardship where we own and operate assets, and we believe in supporting financial well-being through our workplace retirement plans. Today, plan sponsors around the world rely on our retirement plan administration and investment expertise to help their employees plan for, save for, and live a better retirement.
This material has not been reviewed by, is not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions.
-----
Manulife, Manulife Investment Management, Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.
550539
