Last week, as I was working on our monthly Flash Report to clients, I couldn’t help but notice this: In January, anticipated stock market volatility fell to a really low level — 12, as measured by the Volatility Index, or VIX (see chart at left). The VIX is down 40% from a year ago, and 30% from six months ago. Given that there’s lots of uncertainty in the markets, how can this be?

One reason that volatility is low is this: While the S&P 500 has been moving up since the presidential election, it’s not a tide that’s lifting all ships. Some sectors — such as financials and industrials — have done very well, while others have lagged. Because the VIX Volatility Index is calculated on the S&P 500 Index as a whole (see “VIX by the Numbers” below), and not on the 500 individual stocks, stock price divergence is not captured by the VIX.

The actual annualized stock market volatility in January? Also low. It was only 6.5% as measured by standard deviation. According to Bloomberg, this is only the fifth time since 1928 that a year has begun so calmly. Again, as stocks move in different directions, the overall effect could be less overall volatility, not more.

So is the VIX Index a good measure of risk in the markets? No, but that’s not really the intent. The VIX is one of a handful of gauges of investor sentiment, and one that frequently doesn’t tell the whole story.

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VIX by the Numbers

The CBOE Volatility Index (VIX) indicates how volatile investors expect the S&P 500 Stock Index to be over the next 12 months. It’s based on the relative price difference between the cost of options to buy the S&P 500 Index (“calls”) vs. the cost of options to sell (“puts”). The higher the difference, the higher the VIX and the implied volatility of the S&P 500 over the the coming year.

The January 2017 result for the VIX was 12. What this means is that investors are expecting up and down moves in the S&P 500 to be within the 12% range about 67% of the time (one standard deviation). This level of anticipated volatility is quite low. The historical average for the VIX is around 20.

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