Going into the summer of 2017, S&P 500 realized volatility was in the low single-digit percentiles of its distribution range going back nearly 90 years. Measures of S&P 500 short term implied volatility expressed by the VIX Index in late July 2017 touched an all-time intraday record low of 8.84.
This low volatility environment, however, is nothing new. The VIX experienced low bouts of volatility like this in 2005 and 2006. Volatility cycles between high and low periods, just as all market cycles undergo some degree of change either through external stimuli or evolution.
The daily closing historical average (since 1990) of the VIX has been slowly declining and now stands at 19.4. Since 2003, the VIX has closed below 16.25 approximately 50% of the time, and half of those occurrences have been under 13.2. With this in mind, a VIX in the 12–13 range is not “surprisingly” low.
Source: TradeStation, Swan Global Investments
The current streak of no VIX closes above 20 is the third longest in history. The longest one occurred between 2004–2006 and lasted 558 days. Another notable period was between 1991 and 1996 when central banks were also accommodative in a pro-business environment.
Going back to 1928, comparable low volatility (historical) periods have had a median length of 15–16 months (Goldman Sachs, 2017), and there were several periods that lasted more than three years, so it is plausible that the current volatility regime extends further in time.
In addition, not only is US equity volatility extremely low, global volatility, including commodities and currencies, has followed suit.
A break from this “new normal” may be driven by increasing leverage and interest rates or a reduction of central bank balance sheets, or a big geopolitical shock. With the 2017 year behind us, the monthly average of the VIX is on pace to be the lowest in 15 years.