Seeing the CBOE VIX Index close out Q2 2021 at 15.8 is pretty amazing; it was in almost the same spot (15.1) at the end of Q2 2019, after all. In between then and now we’ve had a global pandemic, worldwide economic turmoil, trillions of dollars in fiscal stimulus, and unprecedented central bank policy. And yet, here we are at the same spot in terms of expected near-term US equity market volatility “before times”.
Does that mean “it’s quiet… too quiet out there?” as the old western film meme goes? July and August certainly have reputations for market volatility. Liquidity tends to dry up with summer vacations. Macro surprises therefore hit the market harder than they otherwise might. And since volatility and returns have a negative correlation, this dynamic can make for difficult investment environments.
To find out, we pulled the July – August daily price history for the CBOE VIX Index back to the start of its modern iteration (1990). We indexed every year to the end of June close at 100 and ran the sequence through to the end of August. Finally, we averaged each year’s data into decade-long time series. This washes out any 1-2 years of idiosyncratic market action (think 1998, 2007, or 2015) that could skew the seasonal factor we’re looking at today.
This is the result of that analysis:
Here is what we see in that data:
#1: Yes, the VIX does, on average, increase from the end of June through the end of August. In the 1990s, it rose by an average of 18 percent. In the 2000s the mean change was 9 percent, and the 2010s showed a 17 average percent increase.
#2: How expected volatility develops through July and August has, however, changed over time; what used to be 2 months of incremental volatility has now clustered into just August. Note that in the chart the blue (1990s) and orange (2000s) lines never really break below 100 (the June month-end VIX level) in July. That means the Q2 VIX close was the floor for July expected volatility in those decades. That was not the case in the 2010s (i.e., the most recent timeframe), when the VIX on average traded as much as 10 percent below June’s close.
#3: Make a note on your calendar for August 6th and August 25th, because the seasonal VIX history shows those are typically peak days for summer market uncertainty. Since a rising/peaking VIX generally comes with lower US stock prices, those could be good days for adding to positions. The VIX data is (weirdly) very consistent on this point. “Peak summer VIX” comes 26 and 39 trading days after Q2 quarter end. The 26-day count peak is consistent across all 3 decades. The 39-day count peak was true in the 1990s and 2010s, but not in the 2000s (43rd day there).
That last point raises 2 obvious questions: why does vol peak there, and what does it mean for the next 2 months? Our answers:
#1: Why? We’ve been pondering this question all week and our best guesses are “vacation” and “the end of Q2 earnings season (ex-retail)”. The first week of August is a common time for family vacations in the Northeast, and that certainly fits with the idea that lower market liquidity feeds volatility. On top of that, past the end of July most US companies have reported earnings. That leaves something of an information vacuum, where macro concerns might push stocks around more than usual.
The second August vol peak is likely due to vacation as well, but the annual Federal Reserve Jackson Hole conference also lines up with that week. That’s certainly the case this year: it starts on August 26th, one day after that 39-day count.
#2: How can we use this information to make money in July and August 2021? Our view:
- The most recent (2010s) VIX seasonality pattern shows that July sees on average lower levels than June quarter end, which is a good sign for higher stock prices over the next 2-3 weeks. This fits with our ongoing narrative that Q2 earnings results will be much better than expected and also lines up with the VIX’s recent declines. The Fed’s July meeting is on the 27th – 28th, which lines up with the rising volatility visible in the 2010 line in the chart.
- VIX levels tend to rise sharply past the 3rd week of July, regardless of which decade we’re looking at, which says that it will be better to be lightening up into July’s rally and then start adding back risk in early/late August. We’d be more inclined to the latter period given the upcoming Jackson Hole meeting, since the Fed might lay out its tapering plans then.
Final thought: as much as many investors might wish they could close their books after a remarkably strong first half of 2021, we still have to play out the rest of the year. Knowing when to lighten up and when to add risk will matter to whole-year performance.