Chaos Everywhere! The VIX Yawns
Q4 finally saw a bit of a bounce in risk assets, with US stock markets gaining more than 14% in the S&P 500 from the bottom in October to the top in November. That took volatility pricing to its lowest levels of the year, printing down into the teens at 19.06 on December 2nd.
Volatility, meanwhile, continued its complicated relationship with equity prices in the fourth quarter. While a -5% sell-off may have sent the VIX 10 to 20 points higher in 2017 or 2020, the December S&P loss of more than -5% saw volatility close just a single point higher.
For the year, the VIX rose just 3.5 points, from 17.2 to 21.7 in the seventh worst year for stocks since 1920, worst year ever for the AGG bond index, and worst year since the Great Depression for the 60/40 portfolio (per awealthofcommonsense blog).
We’re looking forward to seeing a bit more stable regime environment.
The path most of us would probably like would be a nice consistent rally back to all-time highs in stocks. However, we’re not so sure that’s in the cards given: a) the Fed’s stance, b) the very real possibility of recession because of that stance, and c) the fact that markets typically bottom after the recession begins.
But whether it does or not, we’re likely to see a more normalized volatility environment in 2023. While frustrating in December, the lack of a spike in volatility that month makes it cheaper to hold in January. Each slight normalization like that, whether due to a rally or due to investors having a good sense of the market’s downside given the Fed, helps allow for potentially greater upside protection.