Interpreting market volatility

may 22, 2017 / por Richard Turnill

Key points

  • Stock market volatility remains below its long-term average, even after last week’s spike. This is not a sell signal, in our view.
  • Global stocks declined last week amid U.S. political turmoil. Oil rebounded and economic data signaled a broadening recovery.
  • Oil markets expect OPEC to officially extend its production cut this week and have already partially priced it in, we believe.

Wall Street’s fear gauge spiked last week amid Washington turmoil. Yet the VIX remains below its long-term average of around 20 after a stretch of near-record lows. This isn’t a signal to sell or of imminent sustained higher volatility, in our view.

S&P return following VIX daily closings below 14, 1990-2017

S&P return following VIX daily closings below 14, 1990-2017

Sources: BlackRock Investment Institute and Thomson Reuters, May 2017.
Notes: The chart shows the range of forward returns for the S&P 500 after dayson which the VIX closes below 14.1. This level corresponds to the bottom quartile of VIX closing levels since the VIX’s inception in 1990 (1,719 out of 6,881 trading days). The bars show the upper quartile, lower quartile, maximum, minimum and average S&P 500 forward price returns for the subsequent three and 12 months.

The VIX represents current near-term stock market volatility levels. Very high VIX levels have been reliable buy signals. The opposite isn’t the case. Low volatility tells us little about the direction of future equity returns. There is a wide range of returns in the three- and 12-month periods following VIX closes below 14.

Focus on fundamentals

Periods of low volatility also do not imply that higher volatility is imminent. Low-volatility periods historically have lasted a long time. They have generally occurred amid economic expansion and predictable monetary policy, both of which we see now. Low volatility today likely in part also reflects investors seeking income by selling volatility in options markets.

We believe a steady economic environment should help keep equity market volatility relatively low, with a sustained and synchronized global expansion in full swing. We see few signs of late-cycle equity market complacency, with diverse leadership in major markets. Yet we believe investors should be wary in asset classes where low volatility has resulted in crowded trades.

A move to a new regime of extended higher volatility would be negative for risk assets. It’s impossible to predict what could trigger this but candidates include a credit crunch in China and a much more aggressive pace of Federal Reserve tightening. Neither is our base case. We also do not rule out short-lived volatility spikes on risks such as further U.S. political turmoil. For now, we believe equity investors are being compensated to take risk, particularly outside the U.S. Bottom line: Look beyond short-term volatility and stay focused on fundamentals.


  Date: vertical line Event
May 23 Japan, U.S., eurozone, Germany flash PMIs; Germany Q1 GDP
May 24 US existing home sales, FOMC minutes
May 25 Organization of Petroleum Exporting Countries (OPEC) meeting
May 26 US Q1 GDP

Oil prices are likely to rise if OPEC officially extends production cuts for another nine months to help reduce global oil supply. However, we believe oil markets have been expecting an extension and have partially priced it in.

  • Global stocks declined as U.S. political turmoil drove a bid for safe-haven assets. Government bond yields fell, yield curves flattened and the U.S. dollar index hit its lowest level since November.
  • Oil rebounded on talk of extended OPEC supply cuts. Brazil’s currency and stocks fell amid presidential corruption allegations. European Central Bank minutes signaled debate about how to communicate an eventual monetary tightening.
  • Strong European and Japanese growth data pointed to a broadening recovery. U.S. industrial production rose by the fastest rate in more than three years. Chinese data again suggested moderately slowing growth.

Global snapshot

Weekly and 12-month performance of selected assets

EquitiesWeekYTD12 MonthsDiv. Yield
U.S. Large Caps -0.3% 6.4% 16.7% 2.1%
U.S. Small Caps -1.1% 1.2% 26.7% 1.3%
Non-U.S. World 0.6% 13.1% 21.2% 3.0%
Non-U.S. Developed 1.0% 13.4% 19.5% 3.2%
Japan 0.1% 7.3% 16.1% 2.2%
Emerging -0.6% 16.1% 30.3% 2.6%
Asia ex-Japan 0.3% 19.0% 31.5% 2.5%
BondsWeekYTD12 MonthsYield
U.S. Treasuries 0.5% 1.7% -0.2% 2.2%
U.S. TIPS 0.6% 1.6% 2.2% 2.2%
U.S. Investment Grade 0.6% 3.1% 4.2% 3.2%
U.S. High Yield 0.3% 4.4% 14.5% 5.6%
U.S. Municipals 0.5% 3.3% 0.7% 2.2%
Non-U.S. Developed 2.1% 5.5% -0.9% 0.7%
Emerging Market $ Bonds 0.1% 5.7% 9.6% 5.3%
CommoditiesWeekYTD12 MonthsLevel
Brent Crude Oil 5.4% -5.6% 9.8% $53.61
Gold 2.2% 9.4% 0.1% $1,256
Copper 2.2% 2.6% 24.1% $5,682
CurrenciesWeekYTD12 MonthsLevel
Euro/USD 2.5% 6.6% 0.0% 1.12
USD/Yen -1.9% -4.9% 1.2% 111.26
Pound/USD 1.1% 5.6% -10.8% 1.30

Source: Bloomberg. As of May 19, 2017.
Notes: Weekly data through Friday. Equity and bond performance are measured in total index returns in U.S. dollars. U.S. large caps are represented by the S&P 500 Index; U.S. small caps are represented by the Russell 2000 Index; Non-U.S. world equity by the MSCI ACWI ex U.S.; non-U.S. developed equity by the MSCI EAFE Index; Japan, Emerging and Asia ex-Japan by their respective MSCI Indexes; U.S. Treasuries by the Bloomberg Barclays U.S. Treasury Index; U.S. TIPS by the U.S. Treasury Inflation Notes Total Return Index; U.S. investment grade by the Bloomberg Barclays U.S. Corporate Index; U.S. high yield by the Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index; U.S. municipals by the Bloomberg Barclays Municipal Bond Index; non-U.S. developed bonds by the Bloomberg Barclays Global Aggregate ex USD; and emerging market $ bonds by the JP Morgan EMBI Global Diversified Index. Brent crude oil prices are in U.S. dollars per barrel, gold prices are in U.S. dollar per troy ounce and copper prices are in U.S. dollar per metric ton. The Euro/USD level is represented by U.S. dollar per euro, USD/JPY by yen per U.S. dollar and Pound/USD by U.S. dollar per pound. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. Past performance is not indicative of future results.

Asset class views

Views from a U.S. dollar perspective over a three-month horizon

Table: Asset class views from a U.S. dollar perspective


Richard Turnill
Global Chief Investment Strategist, BlackRock Investment Institute
Richard Turnill is Global Chief Investment Strategist for BlackRock. He was previously Chief Investment Strategist for BlackRock’s Fixed Income and active ...
Isabelle Mateos y Lago
Chief Multi-Asset Strategist
Kate Moore
Chief Equity Strategist
Jeffrey Rosenberg
Chief Fixed Income Strategist