If you use the CBOE VIX Index to measure where we are on the continuum of market complacency/worry, January is a tough month for that sort of analysis:
- Actual S&P 500 price volatility deeply informs VIX prices. Since the VIX is a 30-day forward projection of price volatility, the market uses 30-day historical volatility to baseline where the VIX should trade on any given day.
- December is usually one of the lowest volatility months of the year, so markets have less information than usual to price where the VIX should properly trade in the more-normal environment of a fresh New Year.
We bring this to your attention because the VIX has gotten off to a sluggish start in 2020 as compared to historical norms:
- Through today, the VIX Index has averaged a daily close of just 12.9 in 2020.
- That is well below its long run mean, where both annual and just-January averages run 19.1.
- As the chart below shows, this January’s average VIX is not far off the record low levels for the first month of 2007 (11.0) or other low tide marks like January 1993/1994/1995 (12.4, 11.3 and 12.3, respectively), 2006 (12.0) or 2017/2018 (11.6 and 11.1).
As for what happens to the S&P 500 across an entire year when January’s CBOE VIX Index average reading is so low (current levels or below), here is that data:
- 1993: +10.0%
- 1994: +1.3%
- 1995: +37.2%
- 2006: +15.6%
- 2007: +5.5%
- 2017: +21.6%
- 2018: -4.3%
- Average: 12.4%
The key takeaway from this analysis: starting off a year with abnormally low expected near-term volatility (what the VIX measures) is not a sign the S&P 500 is set for a fall as the next 11 months unfold. In only once instance (2018) did a sub-13 average VIX reading through January lead to a negative return for the year as a whole. Average returns, as we showed above, are in line with historical norms.