In what felt like the blink of an eye, the first quarter of 2018 is now behind us. We finally got some excitement in the volatility space with VIX rising to levels not seen in a couple of years. After the absolute dud that was 2017, as far as market volatility goes, this was a positive turn of events for those of us that had tired of talking about low volatility and how VIX was not broken, but just reflecting the market environment.
I spent last week on an actual vacation and as I flew home I was playing catch up by listening to some podcasts of Bloomberg interviews from last week. This is part of my effort to be completely up to speed when I arrived at work today. During one interview, I heard the statement that the volatility in the first quarter had been very much an equity market only phenomena and not really shown up in other markets. Of course, when I hear something like that I must run some numbers. The table below is the results of vigorous data downloading to see if the rise in volatility was truly only experienced in the equity markets.
Before sharing some thoughts, here’s an explanation of what is on the table that follows. I took twenty-eight of the volatility indexes calculated and quoted by Cboe Global Markets and did some data crunching. Initially I calculated the average close for each of these indexes in 2017 and in the first quarter of this year to see if any patterns showed up. After doing all that, I decided to go back and calculate the long-term average for each of these indexes (it was long, delayed filled day of travel on Sunday). The historical data for volatility indexes are all over the place, ranging from 1986 to 2012, so I felt I should include the start date for each data set. This can make a difference if we have index data covering the financial crisis of 2008-2009.
After calculating all those averages I looked at where the average close for each index in the first quarter of 2018 measured up compared to the long-term average and the 2017 average. To make things a little easier to decipher, I added some color coding. The comparisons with red boxes indicating the average close for the first quarter was lower than either the long-term average or the average close for 2017 and green boxes indicating the opposite. Finally, I grouped the indexes by type. Hopefully that’s enough of an explanation of what appears below.
Here are some brief takeaways.
- Volatility indexes based on broad based stock indexes (S&P 500, Russell 2000, Nasdaq-100, S&P 100, and Dow Jones Industrial Average) were all higher in the first quarter of 2018 than in 2017.This is no shocker.RVX had the lowest relative premium.Something that is not on the table, but worth noting is RVX closed at a discount several days in 2018, something that has been very rare in the past.
- Note, with one exception, all of these broad-based volatility indexes averaged a lower close than what we’ve seen over their complete histories.The only exception is VXST, but note the start date on that one, January 2011, which means the financial crisis is not included in this data.
- VVIX was an anomaly, averaging well above the long-term average which does include the 2008 time period.
- The next section on the table covers broad based ETF’s that represent foreign markets.All were higher than 2017, but Brazil was basically in line.Looking to the long-term China is just a tad lower than the historical average.(The next sentence is not a political statement – just reporting facts). China may be relatively high, with the recent average close in line with the long-term average, due to tariff talk out of Washington, DC.
- The volatility indexes based on individual stocks were all higher, like the broad-based volatility indexes.However, AMZN and GOOGL volatility were much higher than the average last year, both being in the news lately probably has something to do with that.
- The two fixed income volatility indexes were both dramatically lower in the first quarter than in 2017 as well as over the longer term.I find this interesting as we are in a rate hike cycle and have a new Fed chief.However, implied volatility and volatility indexes are all about expectations and the expectations is that we all know when the next Fed moves are coming.
- The commodity related volatility indexes were also lower on average in the first quarter than over the course of 2017.The one exception is VXXLE but remember this is an index based on options on an ETF that holds energy stocks.I’m going to say this is the result of stock market volatility and not commodity expectations.
- Again, with respect to the commodity space, the first quarter average closing prices (excluding VXXLE) were dramatically lower than the long-term averages.One would think if potential inflation were a looming concern that commodity volatility expectations would be higher.
- Finally, in the currency space, things are mixed with the British Pound and Euro Currency volatility indexes first quarter average closing prices slightly higher than 2017 averages, while JYVIX was much lower.As with most volatility indexes, the currency indexes were lower that their long-term averages.
Volatility indexes are based on the market’s expectations of volatility. The thoughts above are easily debatable and I welcome any feedback. The one takeaway I want to leave all market observers with is that although VIX and other broad-based volatility indexes were higher than they’ve been in some time this past quarter, they are still mostly lower than the long-term averages. Where we are with VIX may feel high, but it’s average over the long-term.