Overall levels of market volatility picked up a bit in September, but finished well below the levels seen at the end of the second quarter. Of course, financial markets were reacting to the “Brexit” concerns in late June, and that was the main catalyst for the uptick in volatility a few months ago. Those anxieties receded into July, and market action was relatively quiet through August. Then September proved to be a roller-coaster month for market volatility, and now, as we enter the final few months of 2016, there are a few looming catalysts that could potentially trigger another uptick in volatility before year-end.
The CBOE Volatility Index (VIX) had its fair share of ups and downs last month. The index hit a low of 11.65 on September 8 before rallying to a September high of more than 20 on the 12th. By month’s end, the index was near 15 and almost smack dab between the high and low (all numbers updated through midday 9/29/2016). For the quarter, however, the market’s "fear gauge" dropped 10.2% and is also a far cry from the levels at the end of 2015, when it finished the year near 20. VIX is down 24% year-to-date.
The CBOE Volatility Index wasn’t the only volatility barometer moving lower in Q3. Table 1 shows the performance of a number of other VIX-like indexes for the past three months and year-to-date. Note that nearly all, except the Emerging Markets Volatility Index (VXEEM), are lower for 2016. In addition to VIX, gold (GVZ), euro currency (EVZ), and Treasury bond volatility (TYVIX) were the big movers in the third quarter—all three moved decidedly lower.
|S&P 500 Volatility||VIX||-10.2%||-24.2%|
|NASDAQ 100 Volatility||VXN||-5.9%||-15.7%|
|Russell Small-Cap Volatility||RVX||-6.0%||-7.1%|
|Emerging Markets Volatility||VXEEM||-0.3%||3.1%|
|Euro Currency Volatility||EVZ||-21.6%||-20.4%|
|Treasury Bond Volatility ||TYVIX||-18.3%||-7.3%|
Table 1: VIX and Other Volatility Indexes. All updated through 9/29/2016 midday. Data source: CBOE. For illustrative purposes only. Past performance does not guarantee future results.
One reason for the decline in VIX in the third quarter is the market’s performance during that period. The volatility index, which tracks the expected or implied volatility priced into a strip of S&P 500 Index (SPX) options, typically moves lower when the equities market heads higher. That was the case in the third quarter, as the S&P 500 gained 2.6% and VIX lost 10.4%.
Looking below the surface of the S&P 500, however, we can see the market delivered a decidedly mixed performance since the end of June. Table 2 shows that technology, financials, and industrials helped lift the S&P in the third quarter. More defensive sectors like telecom, utilities, and consumer staples saw relative weakness. Still, for the year, only financials and health care have failed to score gains.
Table 2: S&P 500 and Sector Performance. All updated through 9/29/2016 midday. For illustrative purposes only. Past performance does not guarantee future results.
Looking forward, the 5.4% year-to-date advance in the S&P 500 might be tested in the fourth quarter as substantial “event risk” awaits. The market must soon navigate a murky third-quarter earnings reporting season with a number of big banks due to kick things off next week. As the earnings results flood the market, the focus will also be on uncertain elections in early November. And don’t forget the Fed, which offers policy updates on November 2 and again in mid-December.
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