The volatility of the stock market directly impacts stock returns and overall performance. History shows us that when the market experiences positive performance, volatility will decrease. Conversely, with an increase in volatility, the market sees a decrease in returns and investors experience increased risk. With the current state of low volatility, we have to wonder how long the market will remain calm, and when we should be concerned.
The VIX is the ticker symbol on the Chicago Board Options Exchange (CBOE) that is used to measure the level of volatility in the market. The VIX is supposed to represent the expectations for the next thirty days, and is commonly referred to as the “fear gauge”. The VIX uses volatility of various S&P 500 index options, which is derived from the capitalization of 500 of the largest companies listed on the Nasdaq and New York Stock Exchange (NYSE).
The VIX is one of the most followed equity indices, and is thought to be an indicator of the US economy.
VIX Hits Record Lows in 23 Years
On December 22, 1993, the VIX hit record lows when it reached 9.48. The historical average of the VIX is typically close to 20, although it has recently been averaging under 10, and on May 9, 2017, the VIX closed at 9.77, the lowest in over 23 years.
We typically see the market perform well during low volatile times, and that is surely the current situation, although we might wonder if the fear index is truly in line with investor confidence? The political turmoil we see regularly these days usually brings about uncertainty, although it appears Investors are not yet concerned or waning in confidence.
What Contributes to the Volatility of the Stock Market?
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News of mergers and acquisitions usually cause market activity, although nothing has been big enough to wake the current sleepy market. One factor may be that there are simply less players in the market than ever before.
Less Market Participants
The merger and acquisition business has been booming in spite of Antitrust laws that are designed to prevent monopolies that would hinder competition. This increase in M&A has contributed to fewer market participants than just a decade ago.
As stated in a July 2015 article from CNN Money, the number of US stocks publicly listed hit a peak record of 7,562 in 1998. According to the Wilshire 5000 Total Market Index from 2015, there were only 3,812 publicly listed US stocks.
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