“The true investor welcomes volatility….a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses.” — Warren Buffett.

If I had a dollar for every time I have said the word “volatility” and talked about it with clients
this calendar year, I’d take one heckuva vacation, preferably to a place where the internet and cell service didn’t exist.

But what is volatility exactly? What does it mean, what causes it, how is it measured, how is it forecast? Let’s break it down.

At its simplest definition, having to do with the stock market of course, volatility is how much and how quickly stock prices move over a given span of time. Other types of volatility, relationships for instance, are another story for someone else to tell. See, Pamela Anderson and Tommy Lee.

Volatility can be caused by a great number of factors and this year is a great example of that. The Federal Reserve pulled back on the easy money policy they utilized to keep things lubricated during the pandemic. Russia decided to invade Ukraine. Persisting supply chain issues have contributed to a shortage of supply, hence rising inflation rates.

Fed Chairman Jerome Powell (who always reminds me of Foghorn Leghorn) has responded to this inflation problem by steadily increasing interest rates.

The philosophy there is that by increasing interest rates, demand will wane and prices will fall. Take all of these fun little tidbits along with plenty of others, roll them up, bake it in a pan and you have the volatility pie we’ve all been dealt a slice of this year. Yummy, isn’t it?

So how does one measure and try to predict market volatility? Well, the VIX of course.

This industry has a plethora of acronyms and buzzwords and you can get lost in them at times. This is another one.

The VIX is short for the Cboe Volatility Index which is a real-time index that represents the market’s implied expectations for the relative strength of the near-term price changes of the S&P 500.

It generates a 30-day forward looking projection of measure of volatility. To do this it calculates the volatility that is implied in S&P 500 option prices and measures the extremity of price movements of the S&P 500 in order to determine the levels of volatility. The VIX generally rises when stocks fall sharply, and declines when stocks rise.

What’s a “good” VIX? What’s a “bad” VIX? As a very general rule, VIX values below 20 generally mean a stable, relatively stress free period of time in the market and values over 30 generally mean larger volatility and more uncertainty and investor fear.

Where are we currently? As the time of writing this – it sits at 26.73. The high of the year was over 36 in March.

What does it all mean looking forward? Well obviously, this is a clear indicator of the Bills winning the Super Bowl. Everyone knows that when the VIX is in the mid-twenties at the start of the NFL season, it means good things for Josh Allen and Bills Mafia. Besides the Bills, it means volatility is a bit high but not anything we haven’t seen before.

The Fed has several more rate increases in its’ holster, and we’ve got a little way to go before inflation does an about face. And then, when it’s good and ready, the VIX will head south and returns will head north. It’s all part of investing. Go Bills.

Original content provided by Gregory Mattacola, CFP, lead adviser at Strategic Financial Services. Content is provided for educational purposes only and should not be used as the basis upon which to make an investment or financial decisions. Investments involve risk and, unless otherwise stated, performance is not guaranteed. Past performance is not indicative of future performance.