Stocks Can Keep Rising Despite a Low in Fear By Brett Eversole The markets haven't been this calm since pre-pandemic times... We can see this through a specific measure of stock market volatility. This gauge just hit its lowest level in more than four years. You might think this sounds troubling. After all, markets tend to be quiet before a major market shake-up. And the last time we saw a low like this was in 2020... right before the pandemic shocked the world. History tells a different story, though. This sense of calm won't kill the bull market. Instead, we can expect stocks to outperform from here... The most popular way to measure market volatility is the CBOE Volatility Index ("VIX"). It looks at the options market to determine how much investors expect prices to move over the next 30 days. Folks often think of the VIX as the market's "fear gauge." That's because the VIX tends to spike when fear and uncertainty show up... And it tends to fall when investors don't have much to worry about. The VIX soared during the pandemic. And it spiked several times during the 2022 bear market. Those were periods of extreme fear. But today? Not so much... The VIX has mostly fallen since stocks bottomed in late 2022. And now, it has hit the lowest level we've seen since before the pandemic began. Take a look...
The VIX fell to less than 12 last month. We've only seen that level a handful of times since 1990, when the data begins. The markets are quiet when we see levels like these... But we shouldn't expect this to be the "calm before the storm." In fact, stocks are likely to outperform from here. To see that, I looked at each new instance of a VIX reading below 12. Again, that's a rare setup. It has only happened 14 other times in 30-plus years. Here's what happened next...
The S&P 500 Index has returned 8.7% annually since 1990. That's already impressive. But buying in low-volatility environments can improve those returns... Similar setups led to 2.9% gains in six months and 10.6% gains over a year. That means a slight slowdown is possible over the next few months... But over the next year, we can expect significant outperformance – and double-digit gains. What's more, stocks were higher a year after these setups 86% of the time. And during the rare losing periods, the largest one-year loss was only 2.6%. So today's risk-to-reward setup is excellent. This isn't what most folks would expect. They'd see a collapsing fear gauge as a bad omen for stocks. But when we look at the data, history shows it's a bullish sign for the year ahead. This low-volatility environment won't doom the bull market. Outperformance is likely over the next year... And that's why we want to keep owning stocks. Good investing, Brett Eversole Further Reading The month of May just had one of its best market rallies in a century. And according to history, that momentum will likely continue. That's why now is not the time to sell... Read more here. Investors are once again taking on risk... But we're nowhere near a mania yet. That's a healthy development for the stock market – because a "risk on" environment tells us the current bull run has plenty of room to run... Learn more here. |
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