After a tumultuous March which sent the VIX*, or fear index, to record highs, world stock exchanges have recouped around half of this year’s coronavirus-linked losses as investors gamble on a strong recovery in 2021. However, industry experts and academics warn not to be complacent as the future is unclear and volatility is likely to be a hallmark of this year’s trading.
According to analysis from Katie Kolchin, director of research of trade association SIFMA, the year started in a benign environment, with the VIX at 12.47 on January 2 and a January average of 13.94, both below 2019 average levels (15.39). Volatility started increasing in February, with an average of 19.63 and high of 39.16, rising to an average of 57.74 and a peak of 82.69. The April average is down to 44.12, with a peak of 57.06.
She said, “What is interesting is that we thought the VIX was on a downward trend, with levels dropping below 40.00 at the end of last week. Yet, we ticked back up this week, with the significant decline in the crude oil futures contract (actually pricing negatively on West Texas Intermediate), as oil demand cratered under this Covid-19 related stay-at-home environment. As we continue to uncover new macroeconomic dislocations, we can expect additional volatility spikes.”
Analysis conducted by London Business School academics Elroy Dimson, Paul Marsh and Mike Staunton also note that this economic crisis differs from the financial crisis of 2008-09 due to the biological component and the ambiguity as to when large parts of the economy might be allowed to restart. As a result, current volatility is here to stay and the VIX could remain much higher than the long run average.
The uncertainty is only fuelled further by research from Oscar Jorda, Sanjay R. Singh, and Alan M. Taylor from the University of California. They took a much longer view and looked at the long-term economic impact of 15 major pandemics dating back to the Black Death in the 14th century. They found that the economic effects tend to persist for years accompanied by below-average asset returns. However, today’s ageing populations could alter outcomes.
They wrote that “the global economic trajectory will be very different than was expected only a few weeks ago. If low real interest rates are sustained for decades, they will provide welcome fiscal space for governments to mitigate the consequences of the pandemic. The major caveat is that past pandemics occurred at time when virtually no members of society survived to old age. The Black Death and other plagues hit populations with the great mass of the age pyramid below 60, so this time may be different.”
*Source Investopedia: The CBOE Volatility Index (VIX) is a measure of expected price fluctuations in the S&P 500 Index options over the next 30 days. The VIX, often termed as the “fear index,” is calculated in real time by the Chicago Board Options Exchange (CBOE). The key words in that description are expected and next 30 days.
