Volatility in the equity market seems to have become a thing of the past. The most important volatility barometer in the world, the VIX Index in the USA, closed below ten points 49 times this year. Such low levels are very rare, before 2017 (between 1990 and the end of 2016) they occurred only ten times. According to our calculations 17 of the lowest 20 VIX levels since 1990 come from the period after June 2017. The other three lowest levels come from the year 1993.
The sepulchral calm in the equity markets is also reflected this year in the price curves of the S&P 500 and the DAX: there have been no notable corrections this year. On a closing price basis, the S&P has been one per cent or more into negative territory on only four occasions (!), the DAX on only sixteen occasions. If the calendar year were to end today, the current “drawdown” – the maximum losses suffered on a closing price basis since the beginning of the year – would be 2.8 per cent for the S&P 500 and 7.3 per cent for the DAX. These are the lowest levels since 1914 (S&P 500) and 2005 (DAX). Actually corrections occur very frequently in the equity market. On average since 1975, the DAX has corrected from localised highs to subsequent lows by 18% on an intra-year basis.
For value-minded investors hoping for falling share prices and lower purchase prices, 2017 has been a disappointment because of the record-low volatility. Momentum-minded investors, by contrast, have had a good time.
Investors who now expect volatility in the equity market will soon rise again towards the average (19 points in the USA / 20 in Germany), could initially be disappointed. Empirically volatility shows less of a tendency towards a gradual return to the mean (“mean reversion”). It is more likely that equity market volatility will remain low until some event or other unleashes a significant upside aberration.
Indeed, given that there are still many investors who have been shying away from risk and volatility ever since the financial crisis of ten years ago, the low volatility must not necessarily be a bad thing because it has a calming effect on nerves.
We continue to expect that the fundamental data will support shares and that these will beat cash and bonds in the next few years. There will probably be sporadic eruptions of fear, such as those we saw in the first few months of 2016, most likely because of geopolitical events, as things are going well in the global economy. We recommend making use of such opportunities to invest in companies that have been excessively penalized by such a drop in share prices.