After a year of surprises that included a British exit from the European Union and the election of Donald Trump in the United States, investors appear to be amazingly calm about the state of global markets. The CBOE Volatility Index, commonly known as the VIX, has settled below 10 for the first time since 1993.
The index measures the volatility investors are expecting based upon the prices for options. Options prices are based on several factors, among them the expected volatility of the underlying asset. The measurement is the expected standard deviation of equity markets annualized.
Past spikes in expected volatility have accompanied fear on Wall Street. The index spiked to 60 at the end of October 2008 in the wake of Lehman Brothers collapse and to more than 40 in September 2011 amidst political squabbling in Washington.
Despite low volatility being a good omen, it has also fallen to lows before market reversals in the past. In 2007, the index also fell to a level of around 10 before the recession set in and lowered volatility could indicate a dearth of contrarians in the market.
Gold prices, an asset purchased in times of fear, also suggests optimism from traders. The price of gold has essentially moved sideways since 2013 at around $1,200 an ounce.
With Macron’s victory in French elections, no forthcoming events on the calendar seem to be large enough to rattle global markets. But, that doesn’t mean investors will not want to have some protection for the portfolio in the event of an unexpected shock. Portfolio insurance has seldom been cheaper.
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