A Refresher on VIX Movement and What Is a Spike
On the whole, Q1 was a "risk on" quarter with equities rallying strongly in January (+6.29%) and posting gains in March (+3.71%) despite some notable headlines and worries around Silicon Valley Bank. For the quarter, a 60/40 portfolio returned 5.40% and the S&P 500 7.50%:
Speaking of that mini “banking crisis”, its portrayal in the media was much larger than the actual market effect, with volatility rising some, but not really spiking.
You may see percentage gains quoted from time to time for the VIX, but that isn’t a great way to look at the VIX, which is itself a percentage number quoting the expected annualized volatility for the S&P 500. We view a “spike” in the VIX as at least 10 points (so from 24 to 34, or 13 to 23, etc), where the so called banking crisis only took the VIX from 20.5 at the start of the month to 26.5.
Now, there was near record volatility in the bond market, with one of the largest two-day declines in rates ever seen as investors rapidly shifted to believing the Fed would quickly shift to an easing stance in the wake of bank issues. Curiously, that historic bond market volatility didn’t quite bleed into equity markets, and instead fueled gains in bonds and eventually equities as they rallied around 6% from their March lows.
Investors seem to be treating the 2022 market losses as the recession period and are buying stocks now like that is in the rear view mirror. But what happens when we actually enter recession? Do we reset the clock and markets to that timeframe? While the market is forward looking, a recession can affect those forward earnings.