Craving Volatility? Be Careful What You Wish For

The VIX is currently low at 15, below its long-term average, yet historical S&P 500 data indicates higher annualized returns for investments made during periods of elevated volatility. While direct market timing based on VIX levels lacks consistent correlation with future returns, the analysis suggests that consistent, long-term investing, augmented by opportunistic capital deployment during extreme market volatility, is the superior strategy for enhancing overall returns.

Analysis

The CBOE Volatility Index (VIX) is currently trading at 15, a level situated below its long-term average of 19 and within the lower portion of its typical one-standard-deviation range of 11 to 27. This indicates a market environment of relatively low expected volatility. Historical analysis of S&P 500 returns since 1990 suggests that periods of elevated VIX have historically preceded higher annualized returns for investors who deployed capital during such times. However, the article critically notes that there is no consistent correlation to make VIX levels a reliable standalone tool for market timing. The primary conclusion is that while attempting to time the market by waiting for volatility spikes is an unreliable strategy, a disciplined, long-term investment approach can be enhanced by opportunistically deploying additional capital during episodes of extreme market stress and abnormally high volatility.

Key Decisions for Investors

• Given the current VIX of 15 is below its long-term average, investors should recognize this does not represent the type of high-volatility opportunity historically associated with superior returns, reinforcing the case for maintaining existing long-term strategies.
• Refrain from using VIX levels as a primary market timing indicator, as the analysis explicitly states there is no consistent correlation between the VIX and subsequent S&P 500 performance.