After a year of pandemic, political, and market craziness, it seems like things have finally calmed down a bit. In the US, the new Covid case count is at the lowest it has been since Covid began. The economy is almost fully reopened, and everyone seems to be less focused on what is going wrong in the world and more focused on what’s going right.
In markets, the CBOE Volatility Index, the VIX, a measure of the volatility expectations priced into the markets, just hit a 52-week low. Investment markets are the calmest they have been since Covid began.
Now the summer is here, and I have often heard traders and market strategists mention how this time of year is always less eventful in markets. This seems like it makes sense. Major portions of the economy are subject to seasonal fluctuations. It wouldn’t be surprising if markets were also seasonal. However, I have the view that often these long-held dogmas aren’t always supported by data, so I set out to see if this one was correct. Well, I ran the numbers, and it turns out this dogma does have some data to support it. As you can see in the chart below, going back from 1990 through to today, the mean volatility during summer months gives us a reading of 18.48. During the rest of the year the average is notably higher by almost a point and a half at 19.84. If we use the median, reducing the impact of the outliers, we can see that the summer months still give us a calmer reading of 17.04 versus 17.67 during the rest of the year.
Looking at this chart that shows the last 17 years of volatility, it does appear that most major and semi-major market events happen outside of the summer months. There are a few blips, like in 2011, but for the most part the spikes in volatility happen outside of the summer months.
Going forward this summer I would expect investment markets to remain calm until the Federal Reserve’s Jackson Hole symposium at the end of August. Due to the Federal Reserve’s involvement in market activities, their announcements surrounding the symposium are going to be critical to the future path of markets. Regardless of what they say, we will likely see the return of volatility at that point.
While I do expect a calm summer, this isn’t a guarantee. The world is still on edge from the pandemic, and anything could happen. The CBOE SKEW Index, which measures the tail risks in markets, for example, is at the highest level it has ever been.
So for now, feel free to take a breather, but don’t get too comfortable.
