Understanding the VIX Spike
The VIX, also known as the Volatility Index, measures market volatility and is often referred to as the “fear gauge” of the market. Recently, the VIX has seen a significant spike, with an 88% increase as of August 2. This sudden rise in the VIX usually signals increased fear and uncertainty in the market, which often leads to heightened volatility. However, looking at historical data over the last 20 to 25 years, this spike might not be as alarming as it seems.
Positive Returns After VIX Spikes
Historically, a spike in the VIX has often been followed by positive market returns within a year. This trend has been consistent over various years, including during major market corrections like those in 2008, 2010, 2015, 2018, and even 2020. Each time, the market saw a significant recovery, and the one-year forward returns were positive in almost all cases. This pattern suggests that while a VIX spike indicates short-term fear, it might also present a good opportunity for long-term gains.
No Meaningful Correction Yet
Interestingly, this time around, the VIX has spiked without a major market correction preceding it. Usually, such a spike occurs after a significant downturn in the market, where investors panic and the VIX rises sharply. The absence of a substantial correction this time adds a layer of uncertainty to the current situation. However, if history is any guide, the probability of positive returns over the next one or two years remains high despite this anomaly.
Data from the past 25 years suggests that the two-year returns following a VIX spike are often in double digits. This trend holds true across various market conditions, whether it’s a financial crisis, a major global event, or just market fluctuations. Investors who have stayed in the market after such spikes have typically been rewarded with significant gains. If the current data holds, we might see a similar outcome within the next couple of years.
The Long-Term Perspective
Over the long term, there has never been a two-year period following a VIX spike that resulted in negative returns. This statistic should give investors some confidence, especially during times of heightened market anxiety. While the VIX spike may signal short-term volatility, it has historically been a precursor to strong market rebounds. This pattern reinforces the importance of staying invested and not letting short-term fear dictate long-term investment decisions.
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