The standard gauge of fear in the market – short-term implied equity volatility (the VIX) – recently touched an 18 month low. Some people think this is a sign of stability: the equity market has rocketed higher post-election, corporate earnings have rebounded and global growth is expected to increase. Others see the new low as a sign of complacency: the worst equity draw-downs often come when nobody expects them, and the low level of the VIX indicates limited demand for downside protection. The idea the VIX could be so low after witnessing such volatility over the last few months understandably seems unsettling to many investors. Is there something else going on? The answer in “yes.”
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