On June 30, 2004 the Federal Reserve Open Markets Committee raised the intended Fed Funds rate from 1.00% to 1.25%. This was the last first time we had an initial hike in interest rates (yes you read that correctly). A lot has happened since this last first hike. I did the quick math and my intern was nine years old, so she’s learned to drive and reached a major milestone that goes along with being 21 years old. When we last had a rise in rates ISIS was either a pharmaceutical stock that was fun to trade or a TV heroine from Saturday mornings. Closer to my interests, VIX futures had only been around for about 3 months.
VIX is what I like to focus on and I have been sharing the chart below for some time. It shows the high low range and average for the spot VIX index since 1990. My normal thesis has been that it appears we are coming out of a period of low volatility and may be heading into a cycle of higher volatility. Note I highlighted 2004 on this chart as it doesn’t quite match up to this line of thinking.
The first rate hike was actually followed by a couple of years of relatively low volatility. I know that goes against conventional wisdom as well as consensus thinking about the markets in 2016. Seeing that it took a couple of years’ worth of rate hikes to push volatility to higher levels makes me wonder if today’s SPX rally is justified and those calling for higher VIX in the near future are a bit early to the game. As always time will tell.