What kind of VIX is appropriate for the Trump Administration?
For investors in general and volatility traders in particular, this is one of the more interesting questions going into 2017. Should the VIX be higher or lower in the context of a Trump Administration relative to the Obama Administration? How much economic policy uncertainty is there in Trumponomics? How will various geopolitical issues wax and wane in the context of a Trump-Tillerson foreign policy agenda?
While these questions are difficult ones, what is not difficult is looking in the rear-view mirror for some historical context, so that is exactly what I did, calculating the historical volatility for each presidency going back to the Hoover Administration. In order to take advantage of stock data prior to the 1950s, one has to make use of the DJIA rather than S&P averages. While VIX data is even more interesting, the VIX was not launched until Bill Clinton’s inauguration and historically reconstructed data from the CBOE only extends back to George H. W. Bush’s presidential term.
The results of the number crunching are included in the chart below and show Herbert Hoover’s historical volatility of 42.87 more than double that of the runner-up, Franklin Delano Roosevelt who posted a historical volatility of 20.88. The only other president to top the 20 level in terms of historical volatility was George W. Bush at 20.28. At the other end of the spectrum, the least volatile presidency was that of Lyndon B. Johnson, where HV averaged an amazingly low 9.12. Following LBJ on the low end are Dwight Eisenhower at 10.70 and Harry Truman at 12.20.
[source(s): CBOE, Yahoo, VIX and More]
Among recent presidents, three of the last four presidencies (George W. Bush is the exception) have seen middling volatility, with Barack Obama 6th of 14 as of today’s data, while Bill Clinton is 7th and George H. W. Bush in 8th place.
Since the eye canot help but see trends and patterns whether they exist in real life or not, I am obliged to observe that since the LBJ presidency there is a pattern of higher highs and higher lows. Could volatility by presidential term be trending up? I am certainly not ready to go that far.
In terms of key takeaways, it is worth noting that the median historical volatility (combining data from Bill Clinton and George H. W. Bush) indicates that a middle-of-the-road presidency can expect historical volatility of 14.65 and a VIX of 18.91. As far as the VIX is concerned, the 18.91 number aligns nicely with current VIX futures quotes for May and June 2017.
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- Volatility During Crises
- Event Risk, Event Theta and the Next Week
- Fear of Governments and Politicians Climb Rapidly as Euro Zone Worries Wane
- Volcker Endorses Obama
- The Case Against High Stock-Market Volatility in 2016 (Guest Columnist at Barron’s)
- Forces Acting on the VIX
- A Conceptual Framework for Volatility Events
For those who may be interested, you can always follow me on Twitter at @VIXandMore
Disclosure(s): the CBOE is an advertiser on VIX and More