The VIX index has been one bright spot in an otherwise apocalyptic investment horizon over the past few weeks.
The benchmark VIX figure, served up to US investors in the Chicago Board Exchange Option Volatility Index, was trading at under US$15 at the end of February, but by mid-March had soared to as high as US$80. Since then, there has been something of a pullback.
The same trend is evident to European investors following the index through the Wisdom Tree S&P 500 (LON:VIX).
This was trading at less than 0.5p towards the end of February, but subsequently spiked at over 8.8p on 19 March before dropping back to the current level of just over 3p.
The strange phenomena of disparate levels of volatility in indexes that are both supposed to be benchmarked to volatility in the S&P 500 can be in part explained by the swings in the relative currencies in which they are offered, by differing levels of skittishness in their respective markets, and probably by volume, although these numbers are hard to find.
Correcting for the effects of sterling’s weakness against the dollar brings London somewhat back in line with the Chicago, but either way, the trend on both indexes is clear: down.
From this point, where the fall on the US side has been 25%, and on the UK side more than 50%, it seems probable that the real peaks are now behind us.
True, there were two peaks in the VIX – around a month apart - back in 2008, when the global financial markets were teetering on the edge of the edge of destruction.
But for it’s worth remembering that back then the bad news came in sporadically and over a long period of time, from the Lehman collapse in September, through to the Dow’s low of 6,594 hit in March 2009. In this scenario the bad news, although it has snowballed in the world’s appreciation of its severity, has largely come in one hit.
And the stimulus has come earlier too, this time round. Indeed, from the perspective of financial history, it has come almost immediately. Back in the global financial crisis of the last decade, President Obama’s stimulus package didn’t arrive till March 2009 which, it may be no co-incidence to note, is when the Dow finally bounced off the worst of its financial crisis lows.
And in the Great Depression that followed the Wall Street Crash President Roosevelt’s stimulus came after a gap of four long years, and that after several mis-steps by the Fed.
So, this time round it will be different, even allowing that higher volatility will no doubt be a feature of markets for some time to come. As US employment numbers bit hard and a rising number of coronavirus cases in New York continued to dominate the US news cycle early on 27 March, the VIX has put on another 10%.
But the wildness of the uncertainty is now over, Congress has acted, President Trump has pronounced, the Chinese economy is getting back to work, and although globally cases are still rising, so is the knowledge and dataset surrounding the virus.
At this point, tucking a little VIX away as a hedge probably couldn’t hurt, but note too, that after an initial rout, investors are now returning to the gold market in significant numbers.
The dynamics of this are significant: selling of gold and gold equities reached its height on 19 March, precisely when the VIX reached its peak. Since then, as the gold markets have rediscovered their mojo, the VIX has fallen back.
In 2008, after those two initial October and November spikes, the VIX then fell away such that by the end of 2009 it was trading, broadly speaking, at the same levels it as at before the global financial crisis started.
And across the same period of time, from 2008 to 2009, gold regained all the ground it had lost during the initial crash, and ended the year up around 10% on 2008 highs, and by considerably more on 2008 lows. It then went on to reach new records in subsequent years.