VIX & Fear

Between Election Day 2016 and February 2, 2018, the VIX remained below historic averages. This relative calm resulted in unusually high risk-adjusted market returns for 2017 and lowered our tolerance for volatility. On April 6, 2018, the VIX closed at 21.49. This is higher than all of 2017 and nearly double the 2017 average value of 11.09 (see chart).

So how does this compare to other years? Looking at the 28 years since the beginning of the 1990's, the mean value for the VIX was 19.35 (Std. Dev. = 7.86). Similarly, looking at the 9 years since the market bottom in the Great Recession, the mean value for the VIX was 18.11 (Std. Dev. = 6.82). Using these historic values, the April 6 close was only 0.3 to 0.5 standard deviations above the 28-year and 9-year means, respectively (see charts).

As readers can see, the current level of the VIX is actually returning back to a more normal range now than the unusual calm of 2017. Putting the VIX fears aside, where is the S&P500 Index relative to its projected value? Back in September 2017, we calculated a expected value for the S&P500 of 2645 for 03/31/2018. In early March 2018, the expected value for the S&P500 was updated to 2592 for 03/31/2018. The closing price for the S&P500 on April 6, 2018 was 2604.47 which is right in-line with the expected values. While this closing price is down roughly 10% from the recent highs, the good news is that our most recent S&P500 expected value for 03/31/2019 is 3030. This price appreciation equates to a 16.4% gain from current levels and depends largely on projected EPS of $158.49 by 03/31/2019. Adding approximate 2% in dividend yield brings the total return to 18.4%.

Conclusions: Investors should get used to more normal levels of volatility and not live under unrealistic expectations of another 2017. Despite the recent 10% correction, the S&P500 price is sitting right where it should be at 2604. Barring problems with the yield curve, earnings falling short of estimates, trade war fears or other recession triggers, the S&P500 could return 18% over the next 12 months.

Charts can be viewed at https://dividendtotalreturn.net/vix-fear/

Submitted April 09, 2018 at 09:44AM by DTRS_Investing https://ift.tt/2qfByyC