The Year in VIX and Volatility (2016)
The consensus called
for a big uptick in volatility in 2016 and while there was a lot of drama, the VIX spikes
were relatively manageable and short-lived.
The VIX opened the year at 22.48 and ended the year at just 14.04. For the full year, the median VIX was 14.31,
while SPX historical volatility for the full year ended up at a mere 13.12.
That being said,
there were five distinct VIX spikes in the graphic below, listed according to
chronology:
- Fears related to slowing growth in China (January)
- A plunge in crude oil prices to $26.05/bbl. for WTIC, as investors grappled with the possibility that Cushing storage facilities would be exhausted (February)
- The surprise Brexit vote result in favor of the U.K. leaving the E.U. (June)
- A cocktail of nearly simultaneous shocks from Fed President Rosengren (suddenly sounding hawkish), Jeff Gundlach (interest rates have bottomed) and the European Central Bank (no additional stimulus) puts pressure on stocks (September)
- Increasing uncertainty leading up to the U.S. election (November)
In all five
instances, the VIX moved up sharply, but in defiance of historical precedent, the
volatility index moved down almost as sharply as it moved up. In fact, some of the biggest extremes for the
year came in the form of volatility
crushes, where the VIX had an unprecedented series of sharp downward
one-day move. Checking the record books,
the only previous year that the VIX posted three top 20 one-day declines was
2007 – and clearly investors were in denial that year. This year the Trump election caused the sixth
largest one-day drop in the history of the VIX, whereas the Thursday before and
Tuesday after the Brexit
vote triggered the eighteenth and tenth largest one-day VIX declines.
On the other side
of the ledger, some of the upward moves in the VIX made the record books as
well. The day following the Brexit vote
saw a 49.3% VIX spike – the fifth highest one-day spike on record. What was even more surprising was the
Rosengren/Gundlach/ECB cocktail noted above triggered a 39.9% spike (eleventh
highest in history) in what seemed to be a relatively calm market environment
in September. It turns out the VIX was
just getting warmed up for greater things, including a record nine consecutive
up days leading up to the November election.
Even with these
extremes, the highs and lows in the VIX were rather middling, with the VIX
peaking at 32.09 on January 20th and hitting an annual low of 10.93
on December 21st.
The graphic
below captures these and other highlights from 2016:
[source(s): StockCharts.com, VIX and More]
Included in the
non-VIX highlights are a 5000+ year low in interest rates in Europe and Japan
(where negative interest rates prevailed) as well as a thirteen-year low in the
price of crude oil. On the geopolitical
front, political craziness of one kind or another abounded in Brazil, South
Korea, Turkey, Italy, Colombia and South Africa, among other locations. Terrorism also left its footprint again in
2016 and Zika also created considerable political and social turmoil. In the financial realm, European banks had a
very difficult year and begin 2017 on shaky footing.
While the year
ended on a relatively quiet not, I suspect 2017 will have much more in the way
of new surprises, including swans of many dark hues. Next week I will resume the VIX and More fear poll and
find out what the consensus is for volatility and its causes in the coming year.
Finally, since
2011, I have been maintaining a proprietary Macro
Risk Index that measures volatility and risk across a broad range of asset
classes, including U.S. equities, foreign equities, commodities,
currencies
and bonds. In 2016, the Macro Risk Index
was trending down most of the year, punctuated by significant spikes in
February (crude oil) and again in June (European currencies).
How did 2016
measure up to expectations? I sum up the
year in My
Low Volatility Prediction for 2016: Both Idiocy and Genius. Also worth investigating are a pair of Barron’s articles from one year ago laying
out two opposing perspectives on volatility in 2016. For the case for rising volatility and what
to do about it, try Jared Woodard’s Prepare
for Rising Volatility in 2016. I
provide the contrarian point of view in The
Case Against High Stock-Market Volatility in 2016.
Have a happy,
healthy and profitable 2017!
Related posts:
- The Year in VIX and Volatility (2015)
- The Year in VIX and Volatility (2014)
- The Year in VIX and Volatility (2013)
- The Year in VIX and Volatility (2012)
- The Year in VIX and Volatility (2011)
- The Year in VIX and Volatility, 2010
- Chart of the Week: The VIX and Volatility in 2009
- The Year in Global Volatility (2008)
- My Low Volatility Prediction for 2016: Both Idiocy and Genius
- VIX Sets New Record with Nine Up Days in a Row
- Top VIX Crushes in History
For those who
may be interested, you can always follow me on Twitter at @VIXandMore
