The VIX, also known as the fear gauge, is a measure of the expected volatility of the S&P 500 index over the next 30 days. It is calculated based on the prices of options on the index. A low VIX indicates that investors are confident and complacent, while a high VIX signals that investors are fearful and uncertain.
According to Macroption, the lowest point recorded of the VIX was 8.56 on Friday, November 24, 2017. It was Black Friday, a day of low trading activity after Thanksgiving. The lowest closing value of the VIX was 9.14 on Friday, November 3, 2017.
The stock market's reaction to a low VIX has been mixed in the past. According to The Wall Street Journal, when the VIX has been below 20, S&P 500 returns over the next three months have often been close to nothing, based on data going back five years. However, according to Business Insider, a low VIX can also signal that the bull market is alive and well, as it reflects strong corporate earnings and low recession risk.
In November 2023, the VIX has declined significantly from its peak of 30.81 in October. As of November 6, it closed at 14.91, its lowest level since September 20. The decline in the VIX suggests that investors have become more optimistic about the economic outlook, despite the ongoing challenges of inflation, interest rates, geopolitical tensions, and the U.S. presidential election. According to Fundstrat's Tom Lee, the VIX could fall further to 12 in 2024, as inflationary concerns ease and the Federal Reserve shifts its policy stance.
The VIX can affect your portfolio in different ways, depending on your investment strategy, risk tolerance, and time horizon. Generally speaking, a low VIX can be favorable for long-term investors who hold a diversified portfolio of stocks and bonds, as it implies a stable and positive market environment. However, a low VIX can also be a warning sign of complacency and overvaluation, which could lead to a sudden market correction or crash.
The 10-year Treasury note is a debt obligation issued by the U.S. government with a maturity of 10 years upon initial issuance. It pays interest at a fixed rate once every six months and pays the face value to the holder at maturity. The 10-year Treasury note is one of the most liquid and widely traded securities in the world.
The 10-year Treasury note is often cited as a benchmark for long-term interest rates, inflation expectations, and economic growth prospects. It also influences the borrowing costs of businesses, consumers, and governments. The yield on the 10-year Treasury note reflects the market's perception of the risk and return of lending to the U.S. government for a decade.
In November 2023, the yield on the 10-year Treasury note has declined from 4.88% on October 31 to 4.57% on November 3. This represents a drop of 31 basis points, or 0.31 percentage points, in four days. The decline in the yield reflects the market's reaction to several factors, such as:
- The Federal Reserve's decision to keep its target interest rate unchanged at 5.25%-5.50% on November 1, and its signal that it will be patient and data-dependent in determining future rate moves.
- The weaker-than-expected U.S. jobs report for October, which showed that the economy added only 150,000 jobs, below the consensus estimate of 200,000 jobs. The unemployment rate also rose to 3.9%, while wage growth slowed to 2.8% year-over-year.
- The ongoing trade tensions between the U.S. and China, which have raised concerns about global growth and inflation. The U.S. is set to impose tariffs on $200 billion worth of Chinese goods on December 15, unless a phase one trade deal is reached before then.
- The political uncertainty surrounding the U.S. presidential election in 2024, which has increased the volatility and risk premium of the bond market. The Democratic candidates have proposed various policies that could affect the fiscal outlook, such as higher taxes, health care reform, and infrastructure spending.
- The lower-than-expected Treasury refunding announcement for the fourth quarter of 2023, which showed that the Treasury Department will auction $112 billion worth of debt securities, down from $115 billion in the previous quarter. This implies a lower supply of bonds in the market, which supports bond prices and lowers yields.
We are in a confusing time for the Economy. It should be obvious that the Federal Reserve is actively attempting to slow down expansionary pressures (Inflation). I think during uncertainty, it is important to pay attention to both the VIX and the Ten-Year. I am additionally mindful of Inflows and Outflows of ETF's, Mutual Funds, and the issuance of Bonds by the U.S. Treasury.
