January 2018 Market Insight

February 1, 2018

Can All-Time Market Highs Continue with All-Time Low Volatility?

We’re one month into the new year already and the market is moving. Before the quick pullback at the end of the month, the S&P 500 had posted a wild 7.45% increase from Jan 1 – Jan 29! There were many positive forces that brought this about, including: strong growth, good earnings, low inflation, and central banks that are not aggressively hiking rates. For now, a “Goldilocks” environment (which refers to ideal market conditions: not too hot, not too cold) continues to add fuel to the fire, but can we expect this growth to continue throughout the year? In addition, we’re seeing record low volatility. Let’s take a closer look.

VIX is the ticker symbol for the Chicago Board of Exchange Volatility Index. It’s a popular measure of the market’s expectation of the 30-day volatility of the S&P 500. Many times the VIX is referred to as the “investor fear gauge.” VIX levels above 30 tend to indicate high volatility; those below 20 tend to indicate low volatility.

The chart below shows the number of days per year the VIX registered 10 or below, a particularly low number.

There are a number of questions that develop from this chart. What can we expect in 2018 from the VIX? Are we entering a “New Normal” for low volatility?

We believe it’s very unlikely that volatility stays this low in 2018, and that 2017 was an extremely unusual year. After all, it was the first time in the history of the market where there wasn’t ONE negative month for the S&P 500.

Volatility will tick up sooner or later and such an environment will present our active fund managers with opportunities to generate excess returns.

IndexJanuaryYTD 2018
S&P 500 Composite (Large Cap)5.73%5.73%
Russell 2000 (Small Cap)2.61%2.61%
MSCI World Ex-Us4.66%4.66%
Barclays US Aggregate Bond-1.15%-1.15%
Keywords: market insight
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