After a real rollercoaster in the stock market, the VIX volatility index, also known as the fear index, recorded its second highest rise in history on Monday last week, only to register its second highest fall the next day. While scary for some investors, volatility can also be good for the markets, writes eToro analyst for Romania, Bogdan Maioreanu.
Historical data shows that one year after such VIX increases, the S&P 500 Index rises more than 90% of the time.
The VIX is published by the Chicago Board Options Exchange (CBOE). It is an indicator of expected stock market volatility, based on options for the S&P 500 index. It is also sometimes called the ‘fear index’ or ‘fear gauge’ reflecting investors’ sentiment at a given time.
At the beginning of last week, on Monday, market fear levels rose strongly. The one-day change in the VIX that day was 65%, the second highest increase in the VIX index on record. The range of volatility of the VIX on Monday was over 42 points, from the daily maximum to the daily minimum, which is the widest trading range on record since 2003.
A larger one-day VIX increase was only recorded on 5 February 2018, during a day dubbed ‘Volmageddon’, when it reached 115%. U.S. stocks sold off as investors fretted that the economy was overheating and the Federal Reserve might raise rates faster than expected. In fact the Monday move last week was triggered also by fear but for the opposite reasons, with investors fretting that the economy will cool down into a recession and the Federal Reserve might be too slow in cutting interest rates.
Just a day later, last Tuesday the level of concern in the market eased, causing the VIX to fall by 28.2%. This was the second largest one-day drop on record for the index. Thus, last week, the VIX recorded its second largest one-day increase, followed by its second largest one-day decrease. This is an unprecedented situation. However, strong one-day increases in the VIX are not uncommon. There are 21 instances where the VIX has risen by 40% or more in a single day. One year after such an event, the S&P 500 index was higher in 90.5% of the cases, achieving an average increase of 18%. There were also 18 recorded instances where the VIX fell by 20% or more in a single day. A year later, the S&P 500 index was higher 83% of the time, with an average return of 7.5%.
Such volatile days can be scary for investors, but they should take into account that pullbacks are normal, and volatility is a standard market feature. Since 1974, the S&P 500 has averaged three pullbacks of 5% or more per year, while the average intra-year pullback is roughly 14%. Also, for traders, volatility can be a good thing as it creates moves in the market that can be speculated for gains with the proper risk and money management. For the long term investors, such volatile days can offer corrections that allow them to access fundamentally sound stocks at better prices, with the possibility of reaching better returns in the long run. Historical data shows that after large swings in the VIX index, equities tend to recover. While every market situation may be different, historical data suggests that such situations may be favourable for long-term investors.
This is why investors with a long-term investing plan should stick with it – and research suggests that they do. According to the recent eToro Retail Investor Beat survey, 82% of Romanian investors and 77% at global level declared that they are confident in their investment portfolio. In fact having an investment plan can help stick to the good ideas that came up during calmer times.
Selling investments in a panic can lock-in losses. Historically, markets rebound, and those who stay invested often benefit from the recovery and take advantage of better market days. A JPMorgan study found that missing the ten best market days between 2004 and 2024 would halve investment returns. Seven of those best days occurred within 15 days of the ten worst days. This is why volatility in the markets comes with goods and bads at the same time, but the investor’s behaviour can make the difference.
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